SNC - SNC-Lavalin Group

[Viking]

Has anyone been following developments at SNC Lavalin? Appears some former executives had some illegal payments set up with Libya's former dictator's family (what a surprise!). The issues will make for some great (negative) press for the next little while.

 

Today SNC announced $80 million in surprises (including $35 million in questionable payments in Libya) and a delay in releasing Q4 and annual results. The stock lost 20% of its value today alone = $1.5 billion. Stock was trading today at $38 and is down almost 40% from its 52 week high. SNC was a 'top pick' of most brokerages and a bit of a 'stock darling' before todays announcement.

 

Is this a little like the AMEX salad oil scandal? Looks to me like the company has good corporate governance and will come clean with what has happened in Libya. Stock looks cheap and underlying business looks solid. The market is saying the issue is serious and will likely severely hurt business moving forward. Or is this an opportunity to pick up a world class company at a multi-year low price (that is experiencing some short term issues)?

 

Anyone been following the company and have an opinion? Can we trust management?

 

http://www.theglobeandmail.com/globe-investor/news-sources/?data-ipsquote-timestamp=20120228&archive=cnw&slug=C7968

http://www.theglobeandmail.com/globe-investor/snc-lavalin-probes-mystery-payments/article2352286/

http://www.cbc.ca/news/business/story/2012/02/28/snc-lavalin-internal-probe.html?cmp=rss

[bathtime]

Thanks for posting this Viking, I don't follow the company, but looks interesting. The BNN video at this link has an analyst discussing the events:

 

http://www.bnn.ca/News/2012/2/28/SNC-Lavalin-stock-tumbles-after-probe.aspx

[petec]

A big chunk of SNC's value - maybe $20/share - lies in the 407 toll road stake.  So the E&C business lost a lot more than 20% of its value yesterday.  My questions would be: if they've delayed results will there be a big restatement, and if so what are underlying profits; and will the reputation damage hurt their ability to win contracts?

[Viking]

Petec, what I like about SNC is their ICI business (407ETR, AltaLink etc) which is very stable with good growth prospects (and valued at about $20 per share). They just purchased CANDU from the Canadian gov't for $15 million and will use nuclear as a new growth lever. This leaves their massive engineering business in the rest of the world (including China and Russia) where they have $9.4 billion in backorders (not including Libya). It looks to me that they have largely exited from Libya over the past year which from a business perspective means it is old news, especially when looking at the Q4 write offs announced yesterday. The key will be if they can get a lid on this thing in the next 4 weeks with no more big surprises coming out of the woodwork; this is what has the market spooked so much.

 

The issue right now is lack of information. What is clear is SNC was riding the Gaddafi horse in Libya for years. With Gaddafi gone I would expect they are toast in Libya. In their Q3 conference call the CEO talks about returning to Libya and collecting unpaid bills. Really? I am hoping he was being politically correct. I would be VERY surprised if they did a stitch of work in Libya moving forward given the hatred towards Gaddafi in Libya and SNC's close ties to the dictator. And perhaps what we are seeing at SNC is a company simply turning the page on a now not so good business relationship (hence a writedown of $22 million presumably for uncollected accounts). SNC has been moving on from Libya for the past year. 

 

It also looks to me like there is a second story here: a couple of executives used their position at SNC to fund some things that the company would not support if more widely understood (the $35 million issue). It looks to me that Aissa (former exec at SNC) had a personal relationship with Gadaffi's son and was determined to get him out of Libya. What was done by SNC and what was done by Aissa while working at SNC (but not sanctioned by SNC) should get clarified in the coming weeks. The fact that two executives were let go gives me some confidence that SNC did the right thing once they understood what was going on. SNC also looks to be doing the right thing at present.

 

Fortunately Libya is a very small part of SNC today. The risk is more (big) bad news comes out. The opportunity is if no more (big) bad news comes out. I doubled down today as I like the risk/reward trade off at current prices.

 

http://news.nationalpost.com/2012/02/11/saadi-gaddafi-snc-lavalin/

[prunes]

Any updates on this?

[fjm222]

Has anyone else been following this story? There is a lot of hair on the situation but the price has come down significantly. End markets are eroding, they are under criminal investigation and management's actions have not been confidence inspiring. I question management mainly because their message changed a month after their investor day. At the investor day in October they presented seemingly healthy end markets and then quickly came out with a restructuring plan in November. After the restructuring plan they continued to talk confidently about having a handle on the business and then announced core E&C guidance yesterday that illustrates that the historic E&C business (ex Kentz- their recent oil and gas acquisition) will not make any money this year.

 

If you are still reading after all that negativity, you likely know that they own some valuable hard assets and have a great deal of cash on their balance sheet. The 407 is a crown jewel asset that continues to grow dividends and is highly sought after, especially in this low rate environment. Is their hard asset value and cash which I estimate to be ~$28/ share enough of a backstop to wade into this situation? In a year that looks likely to be quite bad for their business management is guiding for E&C eps of 1.30-1.60 /share. Is 6x earnings enough of a discount? I believe that the business has the ability to earn in excess of $2.50 in a more normalized environment and E&C peers trade around 12x (give or take depending on mix and quality). That earnings number could be much larger if mining companies are able to raise capital and greenfield developments begin to be discussed.

 

Construction is not a good business but engineering and concession assets are. Anyone have thoughts on when the price provides a margin of safety that is large enough to justify the apparent risks? Any thoughts on risk factors that could make this uninvestable?

 

Every asset has a price- what's SNC's?

[jason]

I was following SNC for a long time feeling there was a huge overreaction from the market for all their legal troubles.  In the end I couldn't bring myself to execute as I just don't feel management is trustworthy.

 

 

[Cardboard]

What is a good P/E for an engineering company? 14 or 15 times? There are some comparables such as Stantec and Aecon.

 

If you multiply your earnings estimate of say $1.50 by 15 times you get $22.50. Add the $28 in value for the 407 and cash and you end up with $50.50. So that is a gain of 36% from current price.

 

If business gets better and you use the 12 multiple on $2.50 you get $30. Now, the gain from current price is 57%.

 

That is not a bad return, but not out of this world. IMO, the stock becomes attractive after an activist shows up and/or if the 407 is sold. Then you could open the door for big buybacks and growing the core business and possibly end up with a multiple bagger.

 

Cardboard

[Liberty]

2 caveats first: 1) I don't know the specifics of this company and 2) you probably already know what I'm about to say, but I want to say it in case a newbie investor is reading this and only looking at the numbers.

 

What sometimes looks like a big discount to IV can actually be quite an efficient price, because bad management can have a large negative IV. The value that is there can be destroyed, or it can be diverted away from shareholders. If you can't trust management, most of the rest is on very shaky ground.

[Guest Dazel]

 

 

SNC is a steal...i would be very surprised if Mr. Buffett is not kicking their tires. do your homework on the 407 it's worth $3 billion plus as it is one of the great global investments...a bribe in Libya really? Do you think the Canadian government would jeopardize the best paying jobs and tax revenue of Canadian giant around since 1911? they will pay a fine.

 

Dazel

[gurpaul88]

 

 

SNC is a steal...i would be very surprised if Mr. Buffett is not kicking their tires. do your homework on the 407 it's worth $3 billion plus as it is one of the great global investments...a bribe in Libya really? Do you think the Canadian government would jeopardize the best paying jobs and tax revenue of Canadian giant around since 1911? they will pay a fine.

 

Dazel

 

Curious on what you think the company is worth.

[Pelagic]

 

 

SNC is a steal...i would be very surprised if Mr. Buffett is not kicking their tires. do your homework on the 407 it's worth $3 billion plus as it is one of the great global investments...a bribe in Libya really? Do you think the Canadian government would jeopardize the best paying jobs and tax revenue of Canadian giant around since 1911? they will pay a fine.

 

Dazel

 

Good call, while not Buffett it looks like other E&C firms are kicking the tires.

 

http://seekingalpha.com/news/2559456-fp-buyers-targeting-snc-lavalin-with-takeover-ambitions

[Guest Dazel]

SNC sold Alta link to Mr. Buffett last year for $3.1 b...I am miffed by the fact he did not buy the whole company at that time...As the 407 is exactly the kind of asset he covets...back out the 407 and other investments...and the $1b in cash...their new business additions  are in oil and gas big in saudi Arabia...they have won two major contracts in Canada in the last two months...the Champlain bridge is worth around $4b.

 

$12b in back log on $9b rev's for $3b market cap when you back out 407 after tax, cash-non recourse debt, and other infrastructure investments.

simple addition...i like simple addition.

 

Mr. Buffett should buy the whole thing. their energy and power assets investments  and ability to build manage and monetize projects fit well with mid American which they have a relationship since the Alta link deal closed..

 

but shareholders will make more if it is split up which is what is happening now...its a win win for shareholders.

 

After i posted there was an article in Financial Post that firms were circling SNC...these are apparently engineering firms...

 

disclaimer: i own it and am still buying...not happy with the jump here.

 

Dazel

[Guest Dazel]

http://www.bloomberg.com/news/articles/2015-06-03/snc-rises-to-highest-since-november-on-report-of-buyout-interest?cmpid=yhoo

 

This article is somewhat correct and that is why Berkshire would be one of the only fits to take over SNC as he would leave the Quebec headquarters...Power Corp would be the other...its a short list. The other problem for anyone trying to steal it is that the majority owner Jarislowsky Fraser (Stephen Jarislowsky) is one of the greatest value investors of all time

 

http://moneyweek.com/stephen-jarislowsky-the-canadian-warren-buffett/

 

This is an old article...but gives you an idea of the man. He has stepped down from the helm since 2012 but make no mistake SNC-Lavalin is still Jarislowsky's baby. It's a great company that is on sale...

 

the best thing for shareholders is for them to continue down the path they are headed (deal with Canadian gov and sale of 407-or not it is a great asset)...a take over would undervalue what will become of SNC-Lavalin but you can be sure that Jarislowsky will not let it go cheap.

 

Dazel

[LesPaul]

Seems like this action was almost directly taken for SNC:

 

http://www.montrealgazette.com/business/Ottawa+softens+anticorruption+rules+companies+seeking+government+work/11191755/story.html

 

MONTREAL - Ottawa has softened its anti-corruption rules, reducing the penalties for companies that are seeking government work after being convicted of bribery, money laundering and other offences.

 

Under the new procurement rules announced Friday, companies can still be barred from government contracts for 10 years if they have been convicted of such offences in the past three years.

 

But that ban can be cut in half if the company co-operates with authorities and takes remedial action.

 

Also, suppliers will no longer be automatically ineligible for government work because of the conduct of affiliates unless it can be demonstrated that the supplier had control over the convicted affiliate.

 

Canada's business lobby has been urging Ottawa to make changes to procurement rules it labelled as "draconian."

 

Public Works Canada says the new rules are fair, ensure due process and better align with international best practices.

 

SNC-Lavalin chief executive Robert Card has warned of the negative consequences for his company if the federal protocols used in awarding contracts weren't changed in light of the company's legal troubles. The company has been beefing up its compliance rules since improprieties surfaced three years ago.

 

The RCMP charged SNC-Lavalin (TSX:SNC) and two of its subsidiaries with one count of fraud and one of corruption last February over its dealings in Libya.

 

The Montreal-based company has said it will plead not guilty to the charges but is willing to pay a fine for the alleged transgressions of former employees. The case will be back in court in October.

 

While the legal case remains outstanding, SNC-Lavalin has been part of various consortia that have won or been selected as preferred bidders for several federal contracts.

 

Analyst Maxim Sytchev of Dundee Capital Markets says SNC-Lavalin isn't "entirely out of the legal woods," but the shorter debarment times and reinstatement opportunities is positive for the company.

[Cardboard]

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aSNC-2314781&symbol=SNC&region=C

 

Is the $600 million price tag a negotiated amount or a put amount that was agreed at the signature of the joint venture between partners years ago?

 

Cardboard

[Studesy]

Last year an announcement was released by SNC stating they may sell 6.7% of their hwy 407 stake (out of their 16% holding).  Analysts pegged a $2+bil valuation on this 6.7% stake. 

 

At a $2b valuation, this implies a $5b valuation on their entire 407 stake.

At a $2.5b valuation, this implies a $6.2b valuation on entire stake.

 

SNC market cap today= $6.1b

 

After today's announcement and subsequent price decline, it seems the E&C division is priced for death. 

[rb]

I like 407 a lot. But that valuation is a bit out to lunch.

[Studesy]

I like 407 a lot. But that valuation is a bit out to lunch.

 

What do you think it is worth?

 

 

This article is from 2017. Seems $4.5 b +  was the concensus then.

https://business.financialpost.com/investing/highway-407-could-be-worth-up-to-45b-in-a-decade-and-thats-good-news-for-snc-lavalin

 

Cheers

 

[rb]

I don't concern myself much with the consensus. I prefer to do my own work.

 

In 2017 their free cash was lets say maybe $567 million. The road is probably worth around 24 times that. So $13.6 billion. SNC I think owns 16.7% of it. So SNC's share is $2.27 billion. I think 2018 free cash should decline because I think their tax rate will go up. Maybe due to my nature I'm a little stingy, but 13.6 is a long way from 45.

 

Furthermore, while I do like 407, some warts are starting to pop up. Most of their growth was price, not traffic. Very profitable growth. But they're starting to bump into the limits of that. So there won't be as much price taking in the future - a combination of government and technology. I say this as someone who's a frequent user and who's family is a frequent user.

 

I should add that I did own SNC in the past. Bought it somewhere below the current price during the bribery scandal and I did very well. But back then it was the 407 stake + Altalink + the E&C and other. Now they've sold Altalink and did an acquisition with the money. An acquisition on which they're taking a huge write-off now. Plus the bribery thing still lingers on. Without Alatalink I don't think the 407 stake is enough cushion against management stupidity. If you like 407 at this point I'd suggest taking a good look at Ferrovial. They're a much more competent bunch than the SNC guys.

[Cardboard]

They are selling 10.01% of it for $3.25 billion with $3 billion at closing in 2 months:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aSNC-2740814&symbol=SNC&region=C

 

So the road as a whole is worth $32.5 billion!

 

Analysts were estimating $2.2 billion for the entire stake of 16.77%. They will still retain 6.76% or a value of $2.2 billion for the rest...

 

https://business.financialpost.com/investing/snc-lavalin-says-good-time-to-sell-a-slice-of-its-highway-407-stake

 

Shares now approaching 52 week low? Some kind of stops triggering strategy before analysts upgrade the stock?

 

Bought some shares this morning.

[Cardboard]

Or maybe I misread the analyst thing and it was $2.2 billion for 6.76.% only. That would still validate the road value at exactly $32.5 billion per this partial sale.

 

If this company was in true distress, you would think that the buyer would have been able to extract better terms. However, they are getting exactly what the analysts were expecting well before any of the recent scandal thing.

 

Cardboard

[Cigarbutt]

Enterprise value seems stretched but there must have been a lot of institutional interest, including pension funds who need to match assets with liabilities in our low interest rate world.

 

In the last few months, I have come across the following two references which underline the importance of contract details (concession life, ability to grow and rise fees).

https://www.407etr.com/documents/presentations/BMO%20Capital%20Markets%20Infrastructure%20&%20Utilities%20Conference%20-%20February%208,%202018.pdf

https://smsfconnect.com/wp-content/uploads/2017/03/What-is-a-toll-road-worth-MAM-RETAIL-March-2017l.pdf

 

When I got interested in investing, I never thought that toll roads would reach such EV/EBITDA ratios.

[Cardboard]

Stock forming a nice bottom, $3 billion of cash coming in within 2 months, CDPQ reducing interest rate on their debt owed by SNC from 6% to 3%, Kenney about to take-over in Alberta or a pro-business, pro-energy supporter and a nice new contract this morning:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aSNC-2744456&symbol=SNC&region=C

 

Cardboard

 

 

[longlake95]

I've started a position at 17 1/2. A little outside my "good company, good management, good price" frame, more like "mediocre company, no management, dirt cheap". I think most, if not all, the bad news is finally priced in. Not quite done my work, but i'm somewhere in the $30/share IV range. It seems Caisse is finally applying pressure to get a new board to get this ship steered away from the rocks. Selling 10% of the crown jewel 407 is not my idea of smart, but I understand the need to stabilize the balance sheet and rebuild trust with investors. At this price your getting the concession/capital business for a discount the the E&C business for nothing - and a free dollop of headline risk. I'm not in the "the backlog is worthless and melting" camp. They still maintain street cred with industry. PPP is here to stay and they are a player. I can only speak to Lavalin's work in mining, where the mine engineers still regularly use Lavalin, and don't bat an eye at the many issue's swirling around SNC - which I believe are fading. I think it's a slow grind for a while, tax loss selling this fall will likely be brutal.

 

I'll continue to pick away...

 

Maybe Bruce Flatt will buy me out...