rb Posted February 18, 2021 Share Posted February 18, 2021 The present value of 934M increasing by a substantial and solidly grounded growth rate made of : 1) diverted traffic from the increasing congestion on the 401 which has reached capacity, 2) growth rate of the GTA population and 3) toll increase least as high as inflation, and discounted by rates in those ranges (lesser than the growth rate) equates to a larger figure than : 78 * 934M or 72 Billion. We have to remove 8.5B debt so the net present value is 64B Thank you for clarifying. I should clarify as well - my questioning relates to trying to understand how "sensitive" a 30B/40B/50B valuation is to growth rates. Toll rate increases are (I assume) part of the concession agreement and therefore quite certain. Traffic growth rates are less certain. What if traffic in the GTA begins to decrease permanently (more work from home etc.)? Particularly if as you say, the 407 has benefitted from all incremental traffic increases as the 401 has been "tapped out". Therefore if the reverse occurs, one would expect traffic on the 407 to decline just as precipitously. The link posted by Cigarbutt (merci) illustrates this: Comparing valuations under static discount rates, the difference between appropriate EBITDA multiples for a growth vs. no-growth is quite extreme, particularly as the length of time remaining under the concession agreement increases. All that said, I agree with Dazel's conclusion here: the 407...has a lot to do with the growth of the Toronto region... But the great part as the greatest investor of all time says...it’s not close. I don’t have to be precise on my 407 and other capital projects they own...there is such a wide discrepancy in the sum of the parts at SNC...the valuation can be low and they win big. The point being at these prices I don't think we require 7+% growth assumptions for the investment to appear attractive. A couple of other notes: TY Dazel for the tax rate clarification. And also, I did not fall in love with the remainder of Ferrovial's projects. Particular their construction segment and other lingering one-offs. LC, you toll rates assumption is incorrect and that is a BIG error. Therein lies the beauty of it. 407 is tolls totally unregulated. Under the concession agreement they basically are allowed to charge whatever tolls they want in order to keep the traffic moving. Now as traffic has increased on the 407 they have increased tolls but they have also added capacity by building extra lanes. But now that capacity is mostly built out so moving forward, to keep traffic moving there will be more price increases and less CAPEX. That's why 407 is special. I'm not aware of any other infrastructure asset with those kind of permissions. You should read the concession. As for the downside I would be more concerned about the HOV lanes than work from home. Ontario is building more HOV lanes (in Canada freeways are a provincial jurisdiction) and they are quite empty. But you can drive on them if you have a green plate. A hybrid vehicle will get you a green plate in Ontario. Someone who's a regular user of 407 can easily have $500 bill a month from 407. All you need to get around that is drive a Prius and honestly 500 a month can get you a lot more than that. Link to comment Share on other sites More sharing options...
LC Posted February 18, 2021 Share Posted February 18, 2021 Thanks for the correction - but would you say it has a huge impact? The model provided from Ferrovial assumes a ~2.75% price increase annually (in line with CPI essentially). Nothing to sneeze at, but I don't think it makes (or breaks) the investment case here. Very good point on the HOV lanes. Link to comment Share on other sites More sharing options...
rb Posted February 18, 2021 Share Posted February 18, 2021 Oh yeah it's huge. The Ferrovial model assumption is not correct. Or let's say It's conservative, whatever. Their price increases has been greater than that while adding capacity and they've been aggressive about adding capacity. You take away that capacity increase and the price take will be nowhere close to 2.75% a year. Link to comment Share on other sites More sharing options...
Dazel Posted February 18, 2021 Share Posted February 18, 2021 The 407 is special period. If SNC successfully transforms into Atkins business model which is comparable to WSP (take a look). There is the opportunity to truly knock the ball out of the park here. If you think WSP is too special...look at Stantec’s business as a comparable and look at the valuation difference between them and SNC services business (hint-it’s larger than Stantec) without the 407. Then....add the 407 to it...you will NOT believe how cheap it looks. Link to comment Share on other sites More sharing options...
SharperDingaan Posted February 18, 2021 Share Posted February 18, 2021 You have two other big wrinkles as well .... Until there is another cut through the Niagara escarpment (not for a very long time), there isn't going to be another west-east corridor. To ease congestion, at some point the Province is going to have to negotiate a volume deal to move truck traffic off the other highways - and onto the corridor. Pricing power, with little risk of non-collection, and easy ability to pass on costs. It's not just a toll-road, it's a right of way through the existing cut. At some point in the next 67+ years, power lines are going to have to run through the cut as well. Probably as the consortium erecting high capacity (4-5x current), state of the art lines through the cut; that local utilities connect to. All that future EV transport has to get its power from somewhere. SD Link to comment Share on other sites More sharing options...
valueinvestor Posted February 25, 2021 Share Posted February 25, 2021 Sold SNC because I thought the downside protection from 407 was removed due to possible increases in interest rates. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 These comments are from Gabriel our resident engineering expert...on SNC’s results today Eng’g services way above outlook SNCL Engineering Services delivers solid Q4 results Q4 2020 revenues of $1.5 billion. Q4 2020 total Segment Adjusted EBIT(1) of $153.1 million, representing a 10.1% margin. Q4 2020 Segment Adjusted EBIT to revenue ratio(2) of 9.0%, 14.8% and 9.6% for EDPM, Nuclear and Infrastructure Services, respectively. Q4 2020 net cash generated from operating activities of $250 million. Q4 2020 bookings of $1.7 billion, representing a 1.10 booking-to-revenue ratio(6). Backlog at $10.9 billion as at December 31, 2020. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 Market hates the headline loss number....management is unable to articulate how cheap the company is...and more importantly not doing anything to take advantage of it. Net debt ($200m) and the 407 and other capital assets ($3.3B6,) excluded it trades for $1b. $1b. $13b back log WSP trades for $15b $8b back log How is WSP not trying to buy this company? How are management not raising debt or selling a small portion of the 407 to buy back their stock.... Crazy. Their business is performing well and LSTK has been written off...growth plan coming...How the hell are they not doing everything they can to buy back stock? They have $900m in cash! Prem.....buy it with Omers and The current big 3 shareholders...management seems oblivious to their value...I don’t want to sell my shares to you anywhere around here but management is asleep at capital allocation someone should be buying it...operationally they are doing a great job! Buffett’s famous line to Nabisco management “If you can’t figure out what to do with your cash...someone else will” In SNC’s case it is cash and capital assets...if WSP does not take it free to them..why not Fairfax? Link to comment Share on other sites More sharing options...
longlake95 Posted March 9, 2021 Share Posted March 9, 2021 Agreed. Q4 was actually pretty good. But all the charges obscure the operating business. People are battle fatigued. I really would have liked to see a SIB and/or higher divvy to signal confidence going forward. While I appreciate that 2020 was a kitchen sink year, they have to starting turning out FCF... Don't sell the capital business...it's a gem... it's probably a good thing that 3 holders own 50% ( I forget...maybe more ) of the stock... I just hope they are calling Ian. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 I agree on the capital business....it the reason why SNC should be bought out stolen at these levels. They should borrow against it and buy back as much stock as possible at these levels. However, if they are not going to do that than the opportunity cost of selling enough of the capital business (they will get full price unlike the balance sheet value that is 0....to buy back 10% of the shares. IAN that is the earnings per share growth plan!!!! How are management so ignorant to their capital structure it is insane. Why won’t anyone listen to Warren Buffett on buybacks when your stock trades for a fraction of its value? It is the same as buying any other company it’s just your own that you know trades for 30 cents on the dollar! What an opportunity...wow. Link to comment Share on other sites More sharing options...
KJP Posted March 9, 2021 Share Posted March 9, 2021 A question about SNC's accounting and cash flow. pg. 146 of the MD&A states: "From a business line perspective, SNCL Engineering Services generated $800.4 million of cash from operating activities in 2020 compared to$732.6million in 2019, while SNCL Projects and the Oil & Gas business presented as discontinued operations used $347.5 million of cash from operating activities in 2020 compared with $731.7 million in 2019. The remaining amount relates to Capital, corporate activities and items not allocated to the Company's segments." Today's press release on 2021 cash flow: "The Company expects net cash generated from operating activities in 2021 to be broadly breakeven, as positive operating cash flow from SNCL Engineering Services will be largely offset by an operating cash flow usage in SNCL Projects." I expect Engineering Services operating cash flow to come down in 2021, but if it generates, say, $400 - $500 million after corporate cash costs, the press release implies that Projects will burn that amount next year. Is that Projects cash burn permanent, or will some or all of it come back as the three remaining Projects are completed? Given all of the charges taken, I wouldn't expect them to be projecting negative EBIT on the remaining Project, so I would assume the cash burn would come from the existing balance sheet. But even after all the charges taken in 2020, contract assets exceed contract liabilities by $250 million, so I wouldn't expect those balance sheet items to be a source of permanent cash burn. On other hand, trade payables and accrued liabilities exceed trade receivables by $530 million. So, I suppose the projected cash burn on Projects in 2021 could be permanent if it represents largely a run-off of net payables. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 KJP, Yes everyone was hit by the break even cash flow...it was asked on the CC. It stems from the light rail LSTK remaining projects in Canada. It is the build out year for them where they provide up front capital to which will covered by milestone payments which are revenue less these cash cash outlays hopefully profit on the difference)! Ian said they are happy with where These projects are going but it is an intensive cash up front year. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 So not cash burn and 2022 becomes a big cash year. That is why I am advocating borrowing to buy back shares...CFO said they would like to leave $500-$600m in cash for projects...so rather than use the $300-$400m in cash for buybacks I would keep this cash against debt or use capital as collateral to buy shares back now...pay back cash when they receive payments from the LSTK light rail projects. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 It sounded like the sale of oil and gas is the trigger point for “growth” and they said they would have capital allocation projections in it. Buyback and dividend raise likely part of the growth plan....but when opportunity knocks like a share price at 30 cents On the dollar you HAVE to take advantage of it...they have $3b in liquidity.... I get conservative after what they have done...but there comes a time for offence and looks like that is now...shareholders at SNC have been screwed by bad decisions...time for them show intelligence. Buy your own stock-company not another one like the KEntz disaster! As for me...I bought for the services... a good business and the 407 cushion...with Lstk done...I would be buying as much of the business’s that I bought for as I could...it would set them on incredible earnings per share growth if they could buy back enough shares at these prices. It should be the backbone of the growth plan...when the shares appreciate above accretive share repurchases up the dividend. It’s just math. This a Buffett buy...Fairfax? Wish I had the money to buy the whole thing...what a steal. They are getting off the operating table...would like to see them start running soon. Link to comment Share on other sites More sharing options...
Dazel Posted March 9, 2021 Share Posted March 9, 2021 Lastly, on the CC they said they had a $27b pipeline.....all services. For a company that trades at $1b (see earlier post) in a bond like business. It is crazy. Anyone have a few billion I can borrow? Link to comment Share on other sites More sharing options...
KJP Posted March 9, 2021 Share Posted March 9, 2021 KJP, Yes everyone was hit by the break even cash flow...it was asked on the CC. It stems from the light rail LSTK remaining projects in Canada. It is the build out year for them where they provide up front capital to which will covered by milestone payments which are revenue less these cash cash outlays hopefully profit on the difference)! Ian said they are happy with where These projects are going but it is an intensive cash up front year. That makes sense. Thanks for clarifying it. Link to comment Share on other sites More sharing options...
Spekulatius Posted March 9, 2021 Share Posted March 9, 2021 KJP, Yes everyone was hit by the break even cash flow...it was asked on the CC. It stems from the light rail LSTK remaining projects in Canada. It is the build out year for them where they provide up front capital to which will covered by milestone payments which are revenue less these cash cash outlays hopefully profit on the difference)! Ian said they are happy with where These projects are going but it is an intensive cash up front year. Well without cash flow, they can’t really do share buybacks. The Engineering/ construction companies usually have issue with extremely lumpy cash flow, which makes it hard to manage the balance sheet. I haven’t really looked at Lavalin‘s balance sheet at all, but based on what you describe, it comes at absolutely no surprise that they don’t do share buybacks. Link to comment Share on other sites More sharing options...
KJP Posted March 9, 2021 Share Posted March 9, 2021 KJP, Yes everyone was hit by the break even cash flow...it was asked on the CC. It stems from the light rail LSTK remaining projects in Canada. It is the build out year for them where they provide up front capital to which will covered by milestone payments which are revenue less these cash cash outlays hopefully profit on the difference)! Ian said they are happy with where These projects are going but it is an intensive cash up front year. Well without cash flow, they can’t really do share buybacks. The Engineering/ construction companies usually have issue with extremely lumpy cash flow, which makes it hard to manage the balance sheet. I haven’t really looked at Lavalin‘s balance sheet at all, but based on what you describe, it comes at absolutely no surprise that they don’t do share buybacks. SNC used to be like Technip Energies, but they're no longer taking on new lump sum work; the remaining Projects are in run-off and should be essentially done over the next 2 years. As I understand it, the business going forward should be essentially all cost-plus professional services. From a free cash flow perspective, that ought to be a much steadier business than the lumpier construction business. Link to comment Share on other sites More sharing options...
Dazel Posted March 10, 2021 Share Posted March 10, 2021 Engineering service business is printing cash...they are in the final stage of correcting the past LSTk business which consumed cash... 407 not on the balance sheet...$3b plus value and they have $900m in cash... There is no excuse not to be buying back shares once oil and gas is gone. Second quarter... Growth plan being introduced for the business as a cash cow...when that happens there will not be an opportunity To buy back shares because they will have doubled. The time to buy back is now. Link to comment Share on other sites More sharing options...
Gabriel Posted March 10, 2021 Share Posted March 10, 2021 Thank you all for your great comments on this board. I have communicated to IR the need to announce a share buy back during the next shareholder meeting and a few other recommendations, two of which have already been implemented (clarity and sale of resources). I know my thesis was shared, acknowledged and appreciated by top management. I have also virtually met with one main shareholder and they confirmed that they support the idea. Link to comment Share on other sites More sharing options...
no_free_lunch Posted March 10, 2021 Share Posted March 10, 2021 At the end of the day I can't figure out where their cash flows normalize. If they didn't have the project division it would be maybe $600m engineering EBITDA and $125m toll road. Any estimate as to where FCF would be in that scenario? Link to comment Share on other sites More sharing options...
kab60 Posted March 10, 2021 Share Posted March 10, 2021 Why are people so sure cost overruns are behind them? Anyone remember CB&I? They had a nice tech biz. But old projects killed them off. Does management have skin in the game? Perhaps judge what they do, not what they say? Link to comment Share on other sites More sharing options...
Dazel Posted March 10, 2021 Share Posted March 10, 2021 No free lunch, Look at the numbers you just put out there....you are paying $1b for those numbers... Kab60, They just took massive write offs....which hammered the stock today....it appears no one is counting Here...if the cost over runs are done and I think they are the market will all reprice their future at once. But I would argue very few are looking at SNC...so it is not function of future cost over runs it is a function of A good company being on the operating table, doing the rehab (reorganization), and now the market is not sure How SNC will look when it’s healthy or if it’s healthy..the same question you are asking. My point is what you are paying right now leaves a lot of room for error. I seem to be repeating myself...so everyone should have their own look with their own eyes. Cheers, Dazel Link to comment Share on other sites More sharing options...
kab60 Posted March 10, 2021 Share Posted March 10, 2021 I think it's a pretty simple case. Takes 5 min to understand the bull case. Why do you think cost overruns are done if they keep taking hits? Is management aligned? Link to comment Share on other sites More sharing options...
Spekulatius Posted March 10, 2021 Share Posted March 10, 2021 Why are people so sure cost overruns are behind them? Anyone remember CB&I? They had a nice tech biz. But old projects killed them off. Does management have skin in the game? Perhaps judge what they do, not what they say? I have the same thoughts. They have reduced their backlog in the SNCL segment from 2.84B to 2.175B and took 0.41B hit doing so. With that much backlog left, it is quite possible that further hits are outstanding. These business are problematic to wind down. Apparently they can‘t sell it and everyone who works there knows the end is coming and probably doesn’t give a damn. Link to comment Share on other sites More sharing options...
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