SNC-Lavalin is a fully integrated professional service and project management company. It is Canada’s largest engineering and construction company by sales and employees.
The company is present in over 50 countries worldwide and offers comprehensive end-to-end project solutions from planning to engineering and construction management to operation and maintenance. The reportable segments are EDPM (53% of sales), Infrastructure (30%), Nuclear (13%), Resources (2%) and Capital (2%). Capital is the investment, financing and asset management arm of SNC-Lavalin, while the project business includes resources and infrastructure EPC projects.
Geographically, America is SNC’s largest market with 51% of sales in 2020, followed by the Middle East and Africa (11%), Europe (33%) and the Asia-Pacific region (5%). SNC has a portfolio of 17 holdings in five countries.
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Sales growth & market presence
With a reputation as a leading partner for engineering solutions, customers trust SNC to deliver complex projects on time. Having a holistic presence throughout the life of a project makes the company the preferred and convenient choice for customers and governments. Most of their businesses enjoy strong competitive advantages and leadership positions in highly attractive end markets.
More than 70% of sales come from blue-chip customers in the oil and gas industry, while the infrastructure business leads the way in Canada’s PPP projects. The engineering firm has built long-term relationships with its partners, including governments, public and private companies and suppliers, since 1911. A leadership position in engineering, procurement and design often results in SNC-Lavalin winning significant global contracts in various sectors.
SNC-Lavalin has a diversified engineering services business in key sectors such as infrastructure, transport and nuclear energy. The company generates its E&C revenue from refundable and engineering service contracts as well as EPC fixed price contracts. She is focused on strengthening her position in the refundable and engineering service contracts as well as standardized EPC contracts, which together make up more than 80% of the company’s total revenue.
The turnkey construction contracts (LSTK) only account for 11% of total sales, compared to 20% last year. The company plans to completely exit this segment in the near future and is making progress in this direction. SNC has almost sold its Resources business, which is a major milestone in its strategy. However, the Mining & Metallurgy Services business will continue to be retained.
Other strategic priorities for the company include promoting consistent performance in engineering services and enhancing organic growth through the use of technology and current skills. SNC’s leading presence in the North American infrastructure and transportation markets secures the company large contracts spanning several decades and continues to win projects in its core regions.
The engineering office has a good chance of benefiting from important projects and infrastructures that are being created for a positive recovery. The company has many opportunities to expand in core services including cybersecurity, defense and innovative housing solutions in the regions.
Regarding the COVID-19 disruption, SNC has remained largely protected by various contractual clauses. The company had bookings of $ 1.7 billion and ended the last quarter with an order book of $ 11.1 billion. SNC expects sales growth in the low single digits and an adjusted EBIT-to-sales ratio of 8-10% in 2021. The Engineering Services business continues to benefit from a diversified business model, long-term customer relationships and a strong focus on the public sector.
SNC has a very low annual dividend yield of 0.24% and a payout ratio of 100%. The company has a solid track record of increasing dividends for the past 17 years through 2017. However, the company cut its dividend by 65% in 2019 and then again by 80% later. The company cut its dividend to reduce debt and strengthen its balance sheet. The dividend is now two cents per share from previously 10 cents per share. SNC has paid quarterly dividends for 30 consecutive years.
As a result of unexpected operational setbacks experienced by SNC in 2018, the company is taking steps to strengthen its balance sheet and create additional flexibility to maximize long-term shareholder returns. His focus on reducing the proportion of its EPC fixed price contracts should further improve its risk profile. SNC is making good progress in reducing risk in its business and achieving consistent income and cash flows.
A high investment grade credit rating, a clear capital allocation strategy, and a strong diversified order book valued at ~ $ 11 billion should support future dividend growth. EDPM is advancing the company’s digital future strategy. The divestment of the Resources Oil & Gas business, announced in February 2021, will reduce its risk profile and accelerate its transition to a leading provider of professional engineering services and project management solutions. Ownership of extensive assets, centuries of experience, wide reach and geographical presence are the strong competitive advantages of SNC-Lavalin.
SNC-Lavalin operates in highly competitive markets both in Canada and internationally. It competes with large, medium-sized and smaller companies. It competes with Stantec, a leading global design and consulting firm that ranks 3rd in North America and 10th worldwide. SNC also competes with Aecon Group, Badger Daylighting, Bird Construction, WSP Global, etc. One of the key differentiators of SNC is its world-class expertise, size and technological capabilities.
With a difficult year in the background and the challenges of the global pandemic, it was not easy for SNC-Lavalin. As technical and technological changes continue to drive the world, SNC should benefit from its expertise in designing, developing and executing solutions to manage these transformations. Infrastructure planning and engineering will be the key to restoring the opening countries.
The company has continued to simplify its business and focus on its core markets, which should help its businesses grow. SNC’s focus on a more stable engineering services business model, highly diversified revenue by region, activity and industry sector, a strong order book with Tier 1 customers and a resilient business model should support future dividend increases.
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