Reposted from Seeking Alpha
By Brian Langis
- The market has overreacted to SNC’s corruption scandal. The scandal should fade in investors’ memory as soon as the settlement takes place. It’s a temporary problems.
- Even though SNC has rebounded from its low, it’s still a bargain. I believe there’s 24% upside potential.
- Plenty of cash, liquidity, high quality assets, and new major contracts could provided a lucrative windfall for SNC.
- 14th straight annual dividend increase. SNC just announced a major share buyback program.
- Despite the cloud that hangs over the company, it continues to win its fair share of meaningful projects.
SNC is primarily traded on the Toronto Stock Exchange under the sticker SNC.to. I will be referring to the Canadian symbol for the article.
Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2205 Price of 1 USD in CAD as of May 21, 2015.
On June 24, 2013 I made the case for investing in SNC-Lavalin. At the time of the publication SNC’s share price traded around $44 with a $6.6 billion market cap. Today SNC’s share price hovers around the same level, not exactly a record to brag about. If you have been following the company in the last couple years, it’s has been a volatile roller coaster ride. In my original thesis, my valuation indicated that the implied intrinsic value of SNC-Lavalin is approximately $8.8 billion or $58 per share for a 31% gain at the time. The good news is that my valuation target was hit a year later, when the shares hit $57.49 a share. The bad news is that the shares started plunging immediately to hit a rock bottom of $36.69 in March 2015. The shares have recovered some lost ground since. Since my first publication on SNC I have added to my position. It’s been a while and a lot has happened. I owe you an update.
Source: Google Finance. June 21, 2013 – May 15, 2015. SNC vs S&P TSX
Since original publication, $1 invested on the S&P TSX gained 23.83% compared to 0.87% if that dollar was invested on SNC. Below is a graph of the 5-year performance.
Source: Google Finance. May 21, 2010 – May 15, 2015. SNC vs S&P TSX
You can see for the 5-year performance chart above that before the corruption scandal erupted SNC was outperforming the S&P TSX. The sudden sharp drop in February 2012 is related to a press release in February 2012 stating that $56 million in suspect payments were made related to win contracts. Along with its reputation, investors saw their former crown jewel’s share price plunge 20%, or roughly $1.5 billion in market capitalization evaporate right away. A lot has been written about the scandal, if you want to know more the Yorkton News website has a very good timeline of the events.
The key question facing investors at this point is:
1) What happened?
2) Will the company survive and move forward?
3) Is this a good investment?
Between my thesis and this article the stock went up and down like a yo-yo. I would take an educated guess that investors’ sentiments took a similar ride. Following the eruption of the scandal SNC did a house cleanup by shaking up management, overhauling its ethics and business practices and by acquiring Kentz Corp. At the time the stock was going upward because it seems that the worst of the corruption scandal was behind, that SNC would pay a fine and settle, and that the Kentz would be very accretive to SNC.
Then following the acquisition of Kentz, SNC’s stock price started going south because the acquisition to expand into oil and gas services occurred just as crude prices were crumbling. The timing of the acquisition was terrible, June 2014, right before the oil crash. This took a toll on the stock.
The other major event that threw SNC under the bus and its shares tumbling to $36.69 was the RCMP announcing it was laying charges stemming from the company’s business dealings in Libya. These kinds of charges in Canada are rare. If convicted, SNC-Lavalin could be banned from bidding on government contracts for 10 years under Ottawa’s so-called integrity framework.
Will SNC Survive and Move Forward?
Yes it will. The market didn’t expect the RCMP charges since it was lead to believe that a solution was in the work. In fact, a Swiss court found that SNC itself was a victim of reprehensible misdeeds, to the tune of $16 million and former employees are already facing charges. Only three Canadian companies have been convicted since 2013 under the Corruption of Foreign Public Officials Act. The allegations raised the possibility that SNC could reorganize its business as a way to deal with the fallout of criminal corruption and fraud charges.
Robert Card’s first choice to resolve the matter is some form of “deferred prosecution” settlement, a system used in the United States to deal with companies accused of corruption. During SNC’s Q4 earnings call last week that Robert Card remained confident he can negotiate a U.S.-style deal with Canadian authorities. “That’s my day-and-night focus,” he said.
The tide has improved somewhat recently with the Federal Government’s latest budget. SNC is set to benefit from Ottawa’s move to restructure its so-called integrity framework, which automatically imposes a 10-year debarment on companies convicted of bribery or corruption of public officials. The Conservative government said it will introduce a new integrity regime for procurements that is “consistent with best practices in Canada and abroad.” It will also purportedly ensure suppliers are given “due process and a whole-of-government perspective, which supports transparent competition and an ethical Canadian marketplace.” However it wasn’t immediately clear when the government plans to make the changes.
The market seemed to have overreacted to the accusations since it doesn’t prevent SNC from bidding on public or private projects, which was confirmed when SNC won the contract for the new Champlain Bridge. The win surprised many investors many of whom had assumed the federal government would shy away from giving public work to a company facing charges of corruption and fraud. Winning the Champlain Bridge contract is a strong vote of confidence in SNC’s ability to secure government work.
Plus, SNC has plenty of cash, liquidity, and high quality assets to weather the storm.
Is this a good Investment?
The rest of the article will focus on the valuation of SNC and its investment merits.
<em> The rest of the article and valuation at Seeking Alpha </em>