SNC-Lavalin: Buy A Highway, Get The E&C For Cheap

This is my most recent research piece on SNC-Lavalin Group published on Seeking Alpha: SNC-Lavalin: Buy A Highway, Get The E&C For Cheap.

Unfortunately the publication of my article corresponded with a significant press release from SNC and a public statement from the CDPQ . On the news the stock went from $25 to $21 per share. That’s my timing for you.

Of course nobody wants to see bad news but I believe this is the news that we were looking for. I see the recent announcements as positives.  It’s like a doctor telling you that you are getting brain surgery to remove a tumor. It’s not good news but that’s what needed. Short-term pain for a better future.

In the article I said that I wouldn’t be surprised that the new CEO takes the quarter as an opportunity to ditch guidance and dump more bad news and that’s exactly what happened. SNC took a $1.9b impairment charge link to its oil and gas division, Kentz. They already took a $1.2b impairment charge back in February. SNC bought Kentz for $2.1b back in 2014. The CDPQ, the largest shareholder with 19.9%, publicly came out against the deterioration of SNC performance. Back in the spring the CDPQ said they will “be a rock” for SNC, I guess they are losing patience like everyone else.

SNC is facing many headwinds, operationally, financially, politically, reputationally…let’s quickly address them:

  • SNC has been having operational issues. SNC some good assets and bad assets. The recent restructure announced will have SNC focus on its strong points. SNC is still in business. They are still winning contracts. SNC is walking away from Turnkey lump sump projects, the key source of its problems. Exit: O&G, mining, and construction which are its least profitable activities.They will focus on design, nuclear, engineering services “EDPM”.  They will be less risky and more cash-flow predictable. More details on the new strategy is expected in the fall. The future SNC might look like more of a WSP Global or Stantec.
  • Finance: SNC took on a lot of debt for its WS Atkins acquisition of $3.6b in 2017. Despite paying a big price for Atkins, it’s one of the strong points of SNC today. To deal with the debt SNC is selling part of their private highway, cut the dividend, and is engaged on a cost cutting program. Once the sale is completed SNC debt’s level should be back to their historical norm of low debt. SNC also has $13.87 (post-H407 sale) of net assets in their Capital Investment Portfolio.
  • Politics: Unfortunately SNC was in the middle of a political scandal for the Trudeau’s Liberal government. SNC was also a victim of a diplomatic spat between Saudi Arabia and Canada. There’s not much in SNC’s control at the moment. Hopefully after the election the government will finally find a solution to SNC’s legal problems.
  • Reputation: SNC didn’t murder anybody but you would think they did. Their reputation is not good. It’s affecting employee morale and departures. The public perception of the company is toxic. SNC is managing a PR crisis. SNC, a 100+ year old company, has its brand; a once valued intangible asset is now in the garbage bin. You can change a reputation. Merck’s Vioxx is responsible for the death of 38,000 people and the company is still around. With SNC it will take time. I don’t expect anything before the Canadian Federal election in October. Plus they have to Libya bribery court case they have to deal with. It will take a lot of time, a string of good news/quarters, and communications to deal its reputation.

With the recent announcements, SNC has a market cap of $3.6 billion, the same price they bought WS Atkins in 2017. Atkins is one of the most respected planning and project management firm in the world. The stock is cheap and very attractive for a competitor looking to expand. The CDPQ has ~20% and RBC recently built a 16.6%. I understand this is a difficult stock to hold or even buy. It’s not supposed to be easy. I believe SNC will eventually emerged a better company.

I suggest to read the article for a more in-depth analysis.
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