MONTREAL – Embattled engineering and construction firm SNC-Lavalin got a boost Monday when an analyst upgraded his rating for the company after the federal government signalled a change in its procurement policy in last week’s budget.
Analyst Chris Murray of AltaCorp Capital said his new target price for SNC shares (TSX:SNC) is $51, up from $43. The shares peaked at $59.63 last summer and closed at nearly $44 Monday on the TSX.
The improved estimate is mainly driven by 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.
In last week’s budget, the Conservative government said it would introduce a new integrity regime for procurements that is “consistent with best practices in Canada and abroad.”
It wasn’t immediately clear when the government plans to make the changes. Public Works spokesman Pierre Alain Bujold said the department has been consulting with industry associations and has hired two third-party experts in procurement ethics before deciding on how to proceed.
The changes won’t resolve all legal issues facing SNC-Lavalin, but Murray said the tone of the budget acknowledged that the current system results in unintended consequences for companies like SNC-Lavalin (TSX:SNC), which has overhauled its ethics practices.
A 10-year debarment would have likely forced SNC-Lavalin into a significant restructuring, possibly including a creditor protection filing, he said.
“While impactful, we believe the company can absorb a substantial fine and be able to continue in its existing form,” Murray wrote in a report.
SNC-Lavalin has said it will plead not guilty to the one fraud and one corruption charge filed in February by the RCMP against the Montreal-based company and two of its subsidiaries over dealings in Libya.
Maxim Sytchev of Dundee Capital Markets said the planned procurement change confirms his belief that there was a low risk that the government would derail Canada’s largest engineering and construction firm.
SNC-Lavalin declined to comment on the government’s intentions, saying it will “abide” by a new federal procurement regime.
Spokesman Louis-Antoine Paquin added that the company will work with the Quebec government to reach a “fair” settlement to recover money improperly paid for public contracts.
SNC-Lavalin, which reports its first-quarter results and holds its annual meeting on May 7, has warned investors of another difficult year for its core operations.
But industry observers say a recent federal award of a $3-billion to $5-billion Montreal bridge contract to a consortium that includes SNC-Lavalin, and an impending award by the Ontario government of the Eglinton LRT transit project in midtown Toronto, should accelerate the company’s future earnings.
Sytchev said SNC-Lavalin’s prospects are brighter after three years of problems. He estimates SNC-Lavalin’s share of the two contracts could be worth more than $3 billion, while at least $2.4 billion after taxes could be realized from the planned sale of its 16.8 per cent stake in the Highway 407 in the Toronto area.
“The expectations are still quite low on this story so when you have the massive 407 divestiture, the big contracts coming in and the regulatory regime more tolerant you don’t need a lot for this thing to move up just because the sentiment was so sour,” he added in an interview.
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