Analysts break ranks to give thumbs up for scandal-marred firm

30 August 2013

The saga of scandal-ridden global engineer SNC-Lavalin took a positive twist this week after a number of industry analysts pronounced that the time was right to buy the Montreal-headquartered firm’s stock.

It has been banned from World-Bank-funded projects, former executives – including a CEO – have been arrested for alleged fraud, and corruption probes involving the firm are underway in multiple countries.

The Canadian representative of anti-corruption body Transparency International, Janet Keeping, told GCR earlier this year that the damage done to the 102-year-old company was "immense" and that "a tonne of other things" would go wrong for it on top of any fallout from the criminal investigations.

This week SNC’s shares closed at CAN$39.55, down 43 cents in Tuesday (27 August) trading on the Toronto Stock Exchange (TSE).

They have fallen 20% from its 52-week peak reached after rallying from months of negative headlines.

But SNC-Lavalin keeps winning work – including a contract announced Monday to build a natural gas compressor station for a major pipeline operator in Colombia.

And as the hole it was in kept getting deeper and wider, SNC never stopped trying to dig itself out – shedding executives as a snake sheds its skin, hiring a new CEO (former CH2M Hill executive Robert Card), and installing an ethics czar ("chief compliance officer") in the form of former Siemens ethics boss, Andreas Pohlmann.

Against this background, some industry analysts have stuck their necks out this week to say "buy" in relation to SNC’s stock.

Continued contract wins mean SNC’s fundamentals are strong, analysts say (Credit: Getty)

According to a Canadian Press (CP) report picked up by several leading newspapers, three analysts are saying the time is right.

Frederic Bastien of Raymond James told CP that SNC’s thriving infrastructure and concessions business will limit any further slide, and recent contract wins, including the Columbia deal, are signs that its fundamentals are sound.

Another analyst, Maxim Sytchev of Dundee Securities, said the Colombia deal, believed to be worth around US$55m, on its own "doesn’t move the needle" for SNC, but that the firm’s ability to win work under its exceptionally dark cloud must be noted.

Mr Sytchev told CP as well that SNC’s focus on cutting administrative costs and the impending completion of difficult projects should improve future results.

He said it was "simply not tenable" that SNC-Lavalin’s shares continue trading "at a substantial discount to its peers".

"Large discrepancies tend not to last in the public markets for a very long time," he said, citing his price target at CAN$52.

A third analyst, Pierre Lacroix of Desjardins Capital Markets, told CP that SNC-Lavalin could produce a "sizable upside surprise" in coming quarters if there is a partial reversal of $170 million of provisions taken in the first half of the year for a handful of troubled projects.

It has been nearly two years since scandal erupted, in November 2011, over allegations of a plot to smuggle Saadi Gadhafi out of Libya. It’s too early to tell whether the rank-breaking of these analysts will spark an upswing in SNC’s fortunes, but its share price did inch upwards to CAN$40.20 at close of yesterday’s trading on the TSE.

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