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.

SNC-Lavalin Group – Hang On The Storm Is Almost Over

SNC-Lavalin
Reposted from Seeking Alpha
By Brian Langis

Summary

  • 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.

Canada: SNC.TO

US:OTCPK:SNCAF

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?

What happened?

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>

 

SNC-Lavalin: Crisis = Opportunity

SNC
I have updated my valuation on SNC-Lavalin. This is met to be read after reading the original report: SNC-Lavalin: Engineering A Margin Of Safety

Reposted from Seeking Alpha
By Brian Langis

Seven months ago I stated my bull case for SNC-Lavalin (SNC.to, OTCPK:SNCAF) in the article SNC-Lavalin: Engineering A Margin Of Safety. At the time of the writing SNC was trading at $43.8. Since the publication investors saw their stock drop to a low of $39.57 to fly back up to $49.74 with two dividends cheques. At the moment of this writing SNC is hovering around ~$46.7. Unfortunately, if you held the US version your returns have been flat because of the slide in the Canadian dollar (USD-CAD $1.02 back in June). This article does not take into consideration currency fluctuation. In 2013 SNC gained 21%, enough to outperform the S&P/TSX Index. Most of the advance came in the final weeks of the year. The article is a follow-up and assumes you read the original in-depth valuation report (If you didn’t I highly suggest it).

Why Invest in SNC-Lavalin
The purpose of article is to update you on the company and its valuation. I have raised my target price to $62 per-share, up from $58 back in June. This represents a 33% upside from the January 29th closing price.

The catalysts that will command the stock higher are a normalization of earnings, stabilization of operations, the market realization of the true value of the ICI assets, and eventually a shift in perception by the market participants from “corrupted company” to focus on long-term fundamentals. Also SNC is in a position to take advantage of continued growth for global engineering services. Click here for the full report.

SNC-Lavalin: Engineering A Margin Of Safety

The McGill University Health Centre Photo Credit: SNC-Lavalin
The McGill University Health Centre Photo Credit: SNC-Lavalin

This is my 2nd article published my Seeking Alpha. My first one, Dollarama – A Stock That Generates Dollars, is still available for free at the moment.

This time SNC-Lavalin Group was the focus of my analysis. I make the case that SNC is currently an excellent contrarian opportunity for several reasons. The article will be free for 30 days. On the blog I’m only allowed to publish the first 250 words so feel free to click on the link to read the entire analysis.

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SNC-Lavalin: Engineering A Margin Of Safety
Reposted from Seeking Alpha
By Brian Langis

SNC-Lavalin Group US: SNCAF.PK Canada: SNC.TO

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.0262 Price of 1 USD in CAD. Source: Bloomberg

“An engineer is a person familiar with known scientific truths and respectful of the laws of nature, one who plans, executes, and economically manages works that will improve the comfort and well-being of humanity.” Arthur Surveyer, November 1917

“In every crisis, there is opportunity.” – Chinese proverb

Investment Thesis

The central focus of this article is to determine whether or not SNC-Lavalin (SNC) is currently undervalued compared to its intrinsic value. In other words, is SNC a bargain? This article will demonstrate that SNC suffers from a price and value disparity because of the corruption scandal and the market not realizing the full value of its investment portfolio. Why? The misconception provides an opportunity and exploiting it will lead to superior performance.

For the rest of the article: SNC-Lavalin: Engineering a Margin of Safety