SNC-Lavalin changes CEO, we maintain our FVE

For now, Morningstar analyst Krzysztof Smalec maintains his ‘Poor’ stewardship rating and reserves judgment on current management before any potential rating upgrade

Morningstar Analysts 12 June, 2019 | 8:30AM
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We maintain our $34 fair value estimate for Prem IconSNC-Lavalin (SNC) after the no-moat engineering and construction firm announced the retirement of CEO Neil Bruce. Chief Operating Officer Ian Edwards, who brings over three decades of experience in the industry, will step in as interim president and CEO. For now, we maintain our Poor stewardship rating and reserve judgment on current management before any potential rating upgrade. Edwards faces a tall order, as SNC-Lavalin has been beset by challenges, including bribery and corruption charges, headwinds in the oil and gas segment due to diplomatic tension between Canada and Saudi Arabia, and recent execution issues.

That said, since he was named chief operating officer in January, Edwards has been instrumental in reviewing SNC-Lavalin’s portfolio and implementing measures to simplify the business and improve project oversight. We look forward to learning more about his strategy, including potential measures to further derisk the firm’s portfolio.

In 2019, SNC-Lavalin consolidated its engineering and construction operations to four segments from seven: resources (which includes the mining and metallurgy and the oil and gas businesses), nuclear, infrastructure, and engineering design and project management, or EDPM. A key differentiator for SNC-Lavalin is its capital segment, through which it invests in infrastructure projects through P3s, or public-private partnerships.

The firm seeks to be involved in all stages of a project, from financing infrastructure projects alongside government agencies, through performing engineering and construction and operations and maintenance work, to selling or retaining its interest in the asset after it is built. This comprehensive package distinguishes SNC-Lavalin from many competitors, which lack the same broad capabilities, and puts the firm in a favorable position to capitalize on infrastructure investment opportunities in Canada. SNC-Lavalin owns attractive assets in its portfolio, including its lucrative stake in Highway 407, as well as its nuclear, EDPM, and capital segments.

However, issues have continued to mount in recent years. SNC-Lavalin faces bribery and corruption charges related to projects in Libya, and the company could face a 10-yearban from bidding on Canadian federal government projects. Furthermore, icy relations between Canada and Saudi Arabia have led to a $1.2 billion goodwill impairment in the firm’s oil and gas business due to materially dimmed prospects in the region. The company also took a nearly $350 million charge in 2018 due to cost overruns on a mining project in South America.

SNC-Lavalin faces very high uncertainty due to this host of issues coupled with high leverage. The company carries a high debt balance after acquiring WS Atkins in 2017, and management has cut the quarterly dividend from $0.287 to $0.10 and announced the sale of 10% of its interest in Highway 407 to help pay off debt. Management is also exploring further options, which could include the sale of WS Atkins.

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