(Montreal) SNC-Lavalin sells its engineering activities in Scandinavian countries. This transaction demonstrates that there would be an appetite for certain assets that the Montreal engineering firm is seeking to sell, according to an expert.
The company has reached an agreement with the French firm Groupe Systra to sell it its engineering activities in Denmark, Sweden and Norway, SNC-Lavalin announced Friday. The value of the divested assets is estimated at £80 million, or approximately C$136 million.
The transaction should be concluded in the fall and would be beneficial for the Quebec company, management said in a press release.
The announcement is part of a strategic business review initiated in March by SNC-Lavalin. “Today, this agreement further optimizes our business portfolio to ensure the deployment of capital and human resources in areas with the greatest potential for value creation,” said President and Chief Executive Officer, Ian Edwards.
Analyst Benoit Poirier, of Desjardins Capital Markets, believes that one of the main elements of the strategic review is to determine which regional activities manage to generate satisfactory margins. “Today’s announcement suggests that this was not the case for the Scandinavian business,” he concludes.
SNC-Lavalin was able to secure a “very attractive” price for a business that generates low margins, Poirier said. “Not only will the transaction allow SNC-Lavalin to deploy capital to its priorities and fund remaining losses from turnkey contracts, but it will also contribute to improved margins for engineering services overall. »
The small size of SNC-Lavalin in the region should ensure that its activities generate low margins, said analyst Maxim Sytchev of National Bank Financial. “We believe that the reasons supporting the transaction are good for both parties, especially since Systra has a relatively large presence in the region. »
The analyst believes that the transaction allays concerns about whether SNC-Lavalin will find buyers for assets that are performing below expectations. “If SNC-Lavalin wants a valuation comparable to WSP or Stantec, the company needs to prune its operations further, including the Linxon firm, but also operations and maintenance and possibly its remaining stake in Highway 407. »
Mr. Edwards has already indicated that Linxon, a subsidiary specializing in electrification projects, was among the assets targeted by the strategic review.
The strategy is moving in the right direction, says Sytchev, who says he gets a lot of questions from investors asking if it’s time to bet on a turnaround. “For that, generating consistent cash flow is a key requirement,” he believes.
On the contrary, Mr. Poirier thinks it is a good time to buy shares of the company. He points out that the stock is trading at a bargain equivalent to about 5 times the earnings before interest, tax, depreciation and amortization (EBITDA) forecast for 2024 compared to comparable companies.
The company’s financial results have been volatile in recent years, particularly due to turnkey contracts. SNC has not been bidding on these types of projects since 2019, as they often experience cost overruns.
The company must still complete three before the activities of this division are completed. These are the Réseau express métropolitain (REM) in the greater Montreal area, the Trillium light rail line in Ottawa, and the Eglinton line in Toronto.
In May, Edward reiterated that the two projects in Ontario were nearing completion and REM was progressing “very well.” “The REM was 75% complete at the end of March. Our quarterly losses are in line with our guidance,” he said at the time during a conference call with financial analysts.
SNC-Lavalin stock peaked around $57 to $60 between 2008 and 2018, before a major correction in its stock. Year-to-date, the stock is up nearly 45%, but it’s still trading nearly 40% below its 2018 peak.
