SNC STOCK STILL HAS VALUE: ANALYSTS
‘Selling on sentiment, not valuation’
TORONTO • SNC-Lavalin Group Inc. announced fresh problems on Monday in the form a $350 million loss in its mining segment, adding to legal woes, a brewing political scandal and business headwinds. Some analyst are suggesting the Montreal engineering giant consider shedding assets.
Since June, SNC shares have dropped 42 per cent, from $60 to about $35. They closed Monday at $34, down 7.4 per cent on the day as news emerged that federal ethics commissioner Mario Dion is looking into allegations the Prime Minister’s Office improperly sought to help SNC avoid criminal prosecution.
Last week, the company, which builds and maintains bridges, nuclear facilities, and mines and also owns part of the 407 highway in Ontario, became engulfed in the scandal that has rocked the Liberal government.
As that controversy engulfs SNC, financial analysts appear to have reached consensus on one point: The share sell-off of the company is probably an overreaction and some are even recommending investors buy shares now.
But analysts are divided about what management can do to prop up the company, including whether a sale of assets makes sense.
“Portfolio de-risking must be a priority,” Maxim Sytchev, an analyst with the National Bank of Canada, said in a note to clients Monday.
Sytchev wrote that SNC should consider selling or winding down its underperforming segments, such as mining, so that investors will give the full-value to its best assets. Other analysts have made similar suggestions.
Last month, during a conference call with investors, one analyst asked chief executive Neil Bruce if the company’s assets would be more valuable in another company because of the diplomatic rift between Canada and Saudi Arabia, where about 15 per cent of its workforce is based.
While Bruce admitted the rift threatens his company’s future work there, he shrugged off the idea that another company could better manage that asset, saying no country is safe from diplomatic rifts.
Bruce has said the company plans to sell part of its 16.76-per-cent stake in the 407 toll highway which cuts across Greater Toronto.
Three analysts interviewed by Financial Post said that the toll road alone accounts for roughly $26.50 to $29 of SNC’s roughly $35 share price.
“It certainly implies they’re not getting a lot of value for the engineering and construction business,” said Chris Murray, an analyst with AltaCorp Capital.
Murray said that if the “persistent undervalue” of the engineering and construction business makes a sale attractive, then the unique politics of the situation complicate everything.
In October, SNC announced that federal prosecutors have refused to entertain a settlement discussion of fraud charges filed in 2015 that accuse its executives of paying millions of dollars in bribes to government officials in Libya under the Moammar Gadhafi regime to win lucrative contracts.
A conviction on the charges could have a crippling effect on SNC’s ability to work on Canadian government contracts.
Last week, the Globe and Mail reported the Prime Minister’s Office pressured former justice minister Jody Wilson-Raybould to strike a deal on the fraud charges with the company that could play a key role in ambitious plans to revive aging Canada’s infrastructure.
Prime Minister Justin Trudeau has publicly denied he or anyone in his office “directed” the minister on the issue.
Inside Quebec, the company enjoys broad political support. It employs thousands of people and the public pension, Caisse de dépôt et placement du Québec, is its largest investor, having increased its stake in December to around nearly 20 per cent.
Earlier this month, as its stock price stumbled lower, Quebec Premier François Legault vowed to protect SNC-Lavalin from any potential foreign takeover.
Mike Willemse, an analyst with Taylor Asset Management Inc., an investor in SNC, said he still believes the company could reach a settlement agreement with prosecutors on the fraud charges. The consequences of a conviction are too high for the company and all its stakeholders, he said.
“Maybe these guys are toast, and there’s going to be massive layoffs and they’re going to have to sell off the company in pieces,” said Willemse.
Alternatively, he said he thinks the company could endure a conviction and still emerge as a strong investment because it’s undervalued at its current price.
“I don’t think people selling today are doing the math, they’re selling on sentiment not valuation,” said Willemse.