Bullish Flag patternt for SNC Lavalin
Morningstar Report:
We assign SNC-Lavalin a very high uncertainty rating.SNC-Lavalin has to contend with a high degree of cyclicality and faces the risk of large losses on individual projects, often due to factors largely beyond its control. The resources segment, which accounted for roughly 30% of total 2018 sales, is subject to strong cyclicality. Because volatility in crude oil, natural gas, and other commodity prices can cause potential customers to defer or even terminate projects, SNC-Lavalin faces a high level of uncertainty in the resources segment. Prolonged weakness in commodity prices could significantly depress demand for some of the firm’s services.As an E&C firm, SNC-Lavalin also faces significant event risk, such as legal disputes and cost overruns (which could be caused by a number of factors, including labor shortages, subcontractor performance, inclement weather, and natural events), which could lead to large losses on individual projects. For instance, in 2018, the company incurred a forecast loss of nearly CAD 350 million on a large mining EPC project in South America. While the firm agreed to an accelerated arbitration process with the client, and management expects some future recoveries, the timing and amount of recoveries remain uncertain. In the aftermath of the project’s underperformance, management said it will rightsize the firm’s mining business and cease to pursue lump-sum EPC mining projects, and we expect that these moves will help mitigate the risk of future cost overruns.
We assign SNC-Lavalin a very high uncertainty rating.SNC-Lavalin has to contend with a high degree of cyclicality and faces the risk of large losses on individual projects, often due to factors largely beyond its control. The resources segment, which accounted for roughly 30% of total 2018 sales, is subject to strong cyclicality. Because volatility in crude oil, natural gas, and other commodity prices can cause potential customers to defer or even terminate projects, SNC-Lavalin faces a high level of uncertainty in the resources segment. Prolonged weakness in commodity prices could significantly depress demand for some of the firm’s services.As an E&C firm, SNC-Lavalin also faces significant event risk, such as legal disputes and cost overruns (which could be caused by a number of factors, including labor shortages, subcontractor performance, inclement weather, and natural events), which could lead to large losses on individual projects. For instance, in 2018, the company incurred a forecast loss of nearly CAD 350 million on a large mining EPC project in South America. While the firm agreed to an accelerated arbitration process with the client, and management expects some future recoveries, the timing and amount of recoveries remain uncertain. In the aftermath of the project’s underperformance, management said it will rightsize the firm’s mining business and cease to pursue lump-sum EPC mining projects, and we expect that these moves will help mitigate the risk of future cost overruns.
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