‘We’re telling investors to avoid the stock’

SNC’s largest shareholder, pension fund Caisse de Dépôt et Placement du Québec, immediately voiced its discontent and warned that the company’s “deterioration” was a “growing cause for concern.”

Raymond James analyst Frederic Bastien didn’t alter his target price on Tuesday because he’d prefer to stay on the sidelines until the company reports earnings next week. Still, his message to shareholders has been clear.

“We’re telling investors to avoid the stock until there’s stabilization in the earnings and until we get more visibility into the legal situation,” said Bastien, who has a hold rating on the stock. “We’re telling people that despite the fact it looks attractive from a valuation standpoint, there’s way too many unknowns.”

Bastien said the widespread target price-cuts Tuesday were perhaps a result of analysts realizing that their projections for the stock may have been too optimistic. Earlier in the year, a majority of analysts covering the stock held on to their positive expectations — even as the stock price was cut in half while the company issued multiple profit warnings, became embroiled in political scandal and faced an impending trial on corruption charges. Some believed the company’s stake in Ontario’s Highway 407 set a floor price on the stock not far below the $30 to $35 range at which it was then trading.

In his note explaining the price cut Tuesday, Sytchev said that while he still views SNC’s stock “as materially below the embedded value of individual businesses” and had foreseen an expectation reset, he was surprised by the magnitude of the writedown. The target price cut was a result of contracted EBITDA and free-cash-flow projections and attributing zero value to its legacy infrastructure and resources businesses.

“With consistent underperformance, we find it hard to justify another value for those businesses at the moment given lack of earnings visibility,” Sytchev wrote.

The target price cuts were not accompanied by any downgrades; the consensus on the Street is that the stock is still a buy. And despite some significant cuts, the target prices do show that most analysts remain hopeful for a significant rebound in the next 12 months. The stock would need to undergo a 78 per cent rally to reach Sytchev’s target or a 70 per cent rally to hit the current consensus rating of $36.75.

From a valuation perspective alone, Morningstar analyst Krzysztof Smalec said the company still has attractive businesses, significant cash and its remaining interest Highway 407. Smalec, who cut his target price on the company to $32 from $34 on Monday, agreed with Sytchev, saying the stock appeared undervalued, but he expects turbulence, due to headline risk, en route to the completion of SNC’s restructuring.

“It’s also maybe a case of over-promising and under-delivering a bit that has consistently pushed that stock price down,” Smalec said. “If the company can show they can string a couple of quarters of solid results with no major execution problems then that sentiment might slowly start changing.”

Asked if he expects this will be the case over the next 12 months, Smalec answered: “I’d call it more hopeful.”

Bank of Montreal analyst Devin Dodge was more skeptical of the company, trimming his price target to $28 — the lowest on the Street. Dodge’s concerns are longterm: he believes there may be further surprises during the wind-down of SNC’s higher-risk business over the next three to five years.

“Valuation appears undemanding but a path to a re-rating is unclear to us,” Dodge wrote.

Financial Post