Snc-Lavalin Group Inc.

ABSTRACT

This report analyzes SNC Lavalin, a design engineering company in Canada. The report assesses the company and its desirability to potential investors.

When comparing the company to its competitors, it is clear SNC Lavalin is a less risky company to invest in, even though its numbers are similar to its competitors, since it has the valuable aspect of consistency. SNC Lavalin is a very stable company in a healthy financial position.

Key words:

Table of Contents

1. Introduction1
2. SNC-Lavalin Group Inc.4

Profitability5

Cash Flow5

Liquidity5

Leverage5

1. Competitor Analysis.4

Current Ratio5

Asset Turnover Ratio5

Return on Invested Capital 5

Return on equity5

Gross Profit Margin 5

1. Industry Analysis.4
2. Recent happenings1
3. Conclusion1
4. Appendices1
5. References1
   

I. INTRODUCTION

SNC-Lavalin Group Inc [SNC] is a top design engineering firm in Canada, and is at the top of the charts for engineering firms around the world (ENR 2011). SNC-Lavalin was founded in 1911 and now has locations in many continents that provide engineering, procurement, construction, project management, and project financing services (SNC 2013).

This report analyzes the company and its potential for investors by first analyzing the company over three years (2010 to 2012 as they started reporting using IFRS standards in 2010) to see the changes in financial statements, ratios, and profitability. The report then uses ratios to compare SNC-Lavalin to two similar Canadian competitors. Finally, the report compares SNC to the construction and engineering industry and remarks on recent news items related to the company. The recommendations are made based on the research from financial statements for SNC and its competitors, as well as the Thomson One database and other current sources.

II. SNC-LAVALIN GROUP INC

Profitability

SNC generates revenue under four categories of activities which include services, packages, O&M (operations, maintenance and logistics) and ICI (infrastructure for public services). The company reported a decrease in net income from 2011-2012 of 18.40% from 378.8 million to 309.1 million despite a 12.22% increase in revenues from  7,209,871 million in 2011 to 8,090,960 million in 2012 with primarily 30.2% increase in services. The falling net income was mainly due to an increase in the selling, general and administrative costs as a percentage of sales from 9.08% to 10.52% (The Financial Times Ltd 2013) (see table 2.1). Driven by a higher volume of activity, gross margin increased from $1252 million in 2011 to 1355 million in 2012. However, there is a decreased gross margin percentage from 17.40% in 2011 to 16.70% in 2012 due to unfavourable cost reforecast on a major power project in the packages category (SNC-Lavalin 2013).

Moreover, there is a decreasing trend in both return on equity (ROE) and return on assets (ROA), which dropped from 27.81% in 2010 to 15.62% in 2012 and 7.31% in 2010 to 4.76% in 2012 respectively (see table 2.2). This implies a reduced effectiveness in generating earnings using the investors’ money and its assets. It is also important to evaluate SNC based on its price earnings ratio (P/E ratio) since it shows how much investors are willing to pay per dollar of earnings. SNC had a P/E ratio of 19.68 in 2012, meaning that the investors in the stock are willing to pay $19.68 for every $1 of earnings that the company generates. Its P/E ratio had been fairly consistent over the last five years, indicating that investors had the same confidence level in its stock.

Cash Flow

SNC did not generate a significant amount of cash in 2012. Even though SNC only generated 504.31 million in cash in 2012 compared to 919.67 million in 2011 from operating activities (see table 2.3), which was due to the higher working capital requirements in the company, it had positive net cash flow from operating activities and positive cash & equivalents at the end of year in the past 5 years. It means that the company did not have to issue more shares or debt in order to generate cash.

Liquidity

In terms of liquidity, current ratio and quick ratio give an idea of the company’s ability to pay back its short-term liabilities with its short-term assets and show a company’s short term liquidity. SNC’s quick ratio had been constantly below 1, and even though SNC managed to maintain a current ratio of over 1 from 2008 to 2011, it dropped to 0.96 in 2012 (see table 2.4). These numbers indicated that SNC could not pay off its obligations if they came due at that point (in 2012). However, the credit risk was significantly reduced since the collection period (from 76 days to 52 days) and the credit period (77 days to 73 days) decreased over the last 3 years (see table 2.4).

Leverage

To assess the financial health of SNC, leverage ratios such as long term debt-to-equity and debt-to-total-capital are used. Long term debt-to-equity measures a company’s ability to repay its obligations. It first dropped slightly from 103.33 in 2010 to 101.42 in 2011 but rose to 113.19 in 2012 (see table 2.5). The increased ratios reveal that there was more debt in relation to equity and SNC was being financed by creditors rather than by its own financial sources, which is not a very good trend. At the same time, long term debt-to-total-capital rose from 50.3 in 2011 to 53.06 in 2012 (see table 2.5), which also pointed out that more cost of the debts was weighed on the company.

III. COMPETITOR ANALYSIS

In order to accurately compare companies’ financial reports, investors must analyse financial ratios. These ratios commonly measure solvency, liquidity, financial flexibility and risk of companies. This report compares SNC to a few competitors using the current ratio, asset turnover ratio, return on invested capital, return on equity (ROE), and gross profit margin. The competitors used are two top Canadian Design Engineering firms that are similar to SNC. The company names are IBI Group Inc. and Stantec Inc., they are both traded on the TSX and provide consulting services in planning, engineering, architecture, design and more.