SNC stock shoots up after settlement
Snc-lavalin Group Inc. shares jumped the most in 11 years after settling a fraud charge related to bribes it paid in Libya a decade ago, a clear sign the fortunes of the Montreal-based engineering and construction firm are turning after a tumultuous year.
Snc-lavalin Construction, a unit of the Montreal-based firm, pleaded guilty to fraud and agreed to pay a $280 million fine over five years, while accepting a three- year probation order. Charges against the parent SNC and its international marketing arm were dropped.
SNC shares jumped the most since 2008 after a trading halt was lifted. They ended the day at $28.70, up $4.58 or 19 per cent, in Toronto.
In a statement the company said while the guilty plea could lead to some risks, it does not anticipate any longterm material adverse impact. SNC predicted it would not be debarred from bidding on federal contracts, and noted that SNC- Lavalin Construction Inc., the subsidiary that pleaded guilty, has not bid on any contracts since 2015.
“This is a game-changer,” Snc-lavalin chief executive Ian Edwards said in a statement, “... and finally allows us to put this issue behind us. I apologize for this past misconduct and welcome the opportunity to move forward.”
Across the country, SNC is still working on some of the biggest transit projects including light rail projects in Toronto, Ottawa and Montreal, as well as hydroelectric, nuclear, wind and other energy projects and any ban on obtaining new work could have an impact.
While SNC is set to pay one of the largest corporate fines in Canadian history, the resolution is in line with many analysts’ expectations. Indeed, Bay Street has remained bullish on the stock even as it sank 70 per cent since mid- 2018 amid uncertainty connected to its criminal case, and a series of missteps and problems in its businesses.
Derek Spronck, an analyst with RBC Dominion Securities, on Wednesday kept his $ 37.50 price target on the company, far above its current share price.
“The settlement clears the way for SNC- Lavalin to finally put behind them past issues and focus on the new strategic direction of the company, which we view as a positive,” Spronck wrote. “The fine is within our expectations, it appears SNCLavalin remains in a position to continue to bid on Canadian Government funded contracts, and we think the SNCL- Services division is wholly undervalued.”
Maxim Sytchev, an analyst with National Bank, said the deal lifted a “legal overhang” on the stock and signalled SNC is “no longer a pariah.”
“In all instances, the reported $ 280- million fine (and) a three-year probation versus the feared outright ban on public work is far removed from the worst- case scenarios that have floated around the company,” Sytchev wrote, putting a $32 price target on the company.
In recent months, some analysts had noted the company appeared to have turned the page under Edwards, who took over as interim CEO in October and has been pushing plans to derisk its business model.
With its stock plummeting to $ 16 this summer from around $58 in June 2018, and its debt- to- cash flow ratios rising, SNC sold a 10.01-percent stake in the 407 toll road that encircles Toronto for $3.1 billion to shore up its balance sheet.
It also faced missteps in its high-risk, high-reward lumpsum turnkey contracts, more often referred to as LSTK projects. In those contracts, a firm agrees to build major projects at a set price and can keep any profits, but alternatively must pay for overruns.
In March, the Chilean copper miner Codelco abruptly cancelled an LSTK contract with SNC after a dispute about the quality of the work, resulting in a $ 260- million writeoff at the time.
Edwards immediately said the company would no longer bid on such contracts.