Companies & Industries

Despite the sullied reputation, investors still confident of SNC Lavalin's growth

Worst is behind it?

While ongoing bribery and kick-back allegations continue to smear SNC-Lavalin’s reputation, investors may take some comfort in knowing the underlying company is strong and continues to have the confidence of analysts.

Shares collapsed when its former CEO Pierre Duhaime was arrested in February 2012. But the stock has shown signs of recovery in the turbulent 18 months since then, and SNC’s share price has remained well above the low levels experienced by the market in 2008-2009. The stock has gained 7.8% since the beginning of 2013.

Investors may be dismayed by the headlines—on Tuesday Arthur Porter, former head of SNC’s building project McGill University Health Centre (MUHC), was arrested in Panama on fraud charges—but analysts do not see the scandals harming the company in the long term.

“Short term, I think that a lot of analysts and a lot of expectations on the street have been dramatically reduced,” says Raymond James analyst Frédéric Bastien.

“But as they improve, and they move on from the ethics scandal to focusing on execution [of projects], we expect that that would ensure positive results into 2014.”

Maxim Sytchev, an analyst with Dundee Securities, says it’s important to focus on the value of what the company still has. Concessions such as the 100 per cent-owned Alberta transmissions company AltaLink, and the partially-owned Highway 407 Express Toll Route in Ontario shouldn’t be overlooked, Sytchev said.

“Both of those assets are extremely valuable, and we also feel they’re being undervalued by the market,” he said.

“Right now, we feel that there is a tremendous amount of value in the company’s shares.”

Still, there is some trepidation regarding the company’s recovery. In a report published May 20, RBC analysts Sara O’Brien and Elaine Lae questioned how long it would take for SNC to improve their future earnings, “given recent management reorganization, focus on ethics & compliance as well as practical distraction created by management changes and external investigations.”

SNC’s troubles will likely be in the headlines for several months to come. Former CEO Duhaime, dismissed from SNC in March 2012, is alleged to have fraudulently handled $56 million in the process of building MUHC. Riadh Ben Aissa, another top SNC exec, is currently awaiting trial in a Swiss jail for allegedly using bribes to get contracts in Libya. There have also been accusations of bribery involving SNC employees in Bangladesh.

On Monday, in an attempt to clear out any more undiscovered scandals, the Montreal-based firm announced it would provide amnesty this summer to any employee with information regarding the company’s ethics problems.

Last week, SNC was given a downgraded rating by Standard & Poor’s Corp., lowering it from BBB+ to BBB with a negative outlook.

While SNC’s profit dropped 19 per cent during the first quarter of 2013, Desjardins Securities analyst Pierre Lacroix says it’s important to note this was largely due to expenditures on new projects that could generate revenue in the future.

“They had to take provisions on two projects in the first quarter which drove their earnings down quite significantly,” said Lacroix.

“They are working on fairly large projects, and if they get it right in terms of execution, they could have decent earnings. From this point, what happened in the past, it’s being dealt with by authorities. Alternatively, at SNC they’re making sure that this kind of problem won’t happen in the future.”

 

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