407 could be SNC’s road to redemption
Engineering firm looks to divest its 16.77% stake in toll highway
SNC-Lavalin Group Inc.’s path back into the good graces of investors is through a highway: The 108-kilometre 407 toll road that the company is looking to divest from. That, and clarity over the company’s strategy to absolve itself of the fraud charges slapped on by the federal government regarding its Libyan business.
But the Montreal-based company’s management didn’t narrow down a timeline for the 407 sale at its fourth-quarter earnings announcement, or reveal much about making headway on the fraud charges.
“This year is our plan [to sell 407]. It’s a complicated process to extract full value from [the 407],” Robert Card, president of the engineering and construction giant reiterated at an investor call. “We have more I’s to dot and T’s to cross and then we will be back with you.”
Divesting its 16.77 per cent stake in the 407 highway would bring some good news for SNC, which saw its old wounds reopened by the federal government, which laid charges for fraud and corruption in February.
Card said the company will fight the charges “vigorously,” but the news had not damaged its relationship with clients or hampered its ability to secure future contracts.
“In the meantime we look forward to continuing our constructive and cooperative relationship with the authority,” Card said. “I want to stress that with these charges there’s no change to our right and ability to bid or work on any public or private projects.”
The stock had fallen nearly 11 per cent from $44.31 since the start of the year, as investors worried about reputational risks to the company, and the latest earnings result saw the share plunge another 6.7 per cent Thursday to end at $36.97.
“Certainly the stock is a heck of a deal right now,” Card said, and some analysts agree.
Maxim Sytchev, managing director, head of research at Dundee Capital Markets, has a price target of $61 for the company.
“When $12.3 billion of backlog is being given $1.1 billion equity valuation, we believe there is a disconnect,” the analyst said in a research note. “At this point, it’s hard to say what will be the catalyst to bridge the gap, but such gulfs rarely persist in the market. 407 remains the catalyst as prized assets will likely garner higher than consensus valuations.”
Others see a bottoming out for the stock. “What else could there be” in terms of bad news, said Bruce Campbell, president and portfolio manager at Campbell, Lee & Ross Investment Management, and an SNC shareholder. “There probably won’t be anything more. And if they manage it properly, and the earnings are consistent with the revised lower number and may be we get an announcement of 407 out of the blue.”
The company is facing other headwinds and working through a legacy of “zero-calorie” orders, that will only cycle out of the system by 2016. Infrastructure, construction, and environment segments remain challenged.
“It is disappointing to see the outlook, given the restructuring initiatives,” Bert Powell, analyst at BMO Nesbitt Burns Inc., said in a note. “At this point we are not sure how much of the 2015 outlook is related to an expectation of ongoing legacy issue in the infrastructure segment, which had a very poor showing in 2014.”
“We believe our oil and gas subsegment is going to be a driver of our future growth and a main contributor to 2015 net income,” Card said, bolstered by the company’s acquisition of UK-based Kentz Corp. last year.
But oil prices have crashed nearly $50 US from six months ago.
SNC’s adjusted net income stood at just over $106.67 million in the fourth quarter, compared with $106.07 million during the same period in 2013. The company raised its quarterly dividend by a penny to 25 cents per share.
Revenue for the quarter stood at $2.82 billion, up from $2.12 billion, and ahead of the consensus estimate.
SNC said it was targeting adjusted earnings per share from its engineering and construction business at between $1.30 and $1.60 — well below the $2.24 average estimate of analysts surveyed by Bloomberg.