Opportunity may knock in SNC’s current uncertainty
Its future is shrouded in uncertainty and a court case tied to allegations of corruption is looming, but that hasn’t turned analysts against SNC-Lavalin
Group Inc., with some believing it remains an attractive investment option.
The Montreal engineering and construction company, which was charged by the RCMP in 2015 with fraud and accepting bribes in the range of $150 million to $200 million over a project in Libya, was denied a remediation agreement last week. An agreement with the Public Prosecution Service of Canada would have resulted in fines, remediation and co-operation instead of continued prosecution. Now, the company is expected to go to court on Oct. 29.
Immediately after SNC announced there would be no remediation deal last Wednesday, its share price nosedived, posting a singleday loss of 13.5 per cent to close at $44.86. Analysts at the major Canadian banks each cut their target prices for the shares — with CIBC predicting the largest slide to $52 from $68.
But the drop in share price, analysts said, now means that SNC is being undervalued — providing investors with what may be an attractive opportunity.
“The persistent undervaluation does two things,” Chris Murray, an analyst at AltaCorp Capital said. “One, (it) creates an opportunity for someone to look to buy the company and the other thing is that it offers good value for investors.”
On Monday, SNC’s shares bounced back up to $47.75 — a 6.4-per-cent increase from its closing price last Wednesday. On Tuesday, share prices continued to rebound, closing at $48.42.
Shares had been trading for an average of $55.63 since SNC announced the acquisition of British engineering firm WS Atkins PLC for $3.6 billion on July 3, 2017. Since then it has secured multiple contracts — including one to build Montreal’s new LRT and others in the Middle East, Asia and the U.S.
If the stock price remains depressed, the company could be forced to consider alternative strategies — including some kind of breakup — to solve its woes, according to BMO analyst Devin Dodge.
In an Oct. 14 note, Dodge suggested that a prolonged court case could seriously harm SNC’s engineering and construction division. Breaking the company up could instead “bring value to a battered shareholder base,” Dodge said.
Dodge estimated that in a breakup, the engineering and construction portion of the company would be worth between $28 and $40 per share. The company’s investment and asset management division could be worth an additional $28 per share, meaning that in total, shares could reach $68. That would be equal to a 40.4-per-cent increase.
While Dodge said a breakup is possible, SNC is likely to “exhaust its other options” first, he added in an email to the Post.
SNC spokesperson Nicolas Ryan would not comment on speculation of a breakup of the company, but did say the company is looking into the potential sale of about 40 per cent of its roughly 16-per-cent stake in Ontario’s Highway 407 to generate shareholder value.
Given market conditions, Dodge said such a deal could yield even more than the $26 per SNC share currently expected in BMO’s model.
Ryan said that if the share price remains low, SNC will also look into buying back its own shares.
The company could also use the proceeds from a potential Highway 407 stake sale to make another transaction similar to the WS Atkins one, which would allow them to expand and diversify, Murray said.
The WS Atkins deal and a separate transaction to purchase Irish contractor Kentz allowed the company to expand its business in Saudi Arabia. More than 10 per cent of its profits in 2017 came from the oil-rich region.
Although the company has solidified its reach in Saudi Arabia, Edward Jones Investments analyst Daniel Sherman said that under CEO Neil Bruce, SNC has also worked in the opposite direction to turn toward safer contracts.
BRING VALUE TO A BATTERED SHAREHOLDER BASE.
“They’re bidding on things like nuclear power plant decommissioning which takes place over 10 years and they’re mostly getting paid for their expertise,” Sherman said.
Bruce may have to continue to reposition SNC if the company is found guilty in court, something that could make them ineligible to bid on Canadian government contracts for up to 10 years. According to an Oct. 11 note from Desjardins Capital Markets, less than 15 per cent of SNC’s revenue comes from these contracts.
Further uncertainty could come from its connection to Saudi Arabia as tensions with Canada may again be inflamed over the alleged assassination of journalist Jamal Khashoggi. When Saudi Arabia and Canada butted heads in August over human rights activists, SNC’s shares consistently dropped.
It’s this uncertainty, Sherman said, that is causing share prices to be so volatile. But investors should be willing to go along for the ride.
“If the fine isn’t extreme and the remedies aren’t extreme and we get certainty, then, yes I think we’ll start to see more sunny skies,” Sherman said.