With SNC-Lavalin Group under investigation for missing funds, and its former vice-president Riadh Ben Aissa believed to be under arrest in Switzerland, investors are freaked that the massive engineering firm is on its last legs.
For that very reason, the company is saying everything it can to assure the market that its operations will stay strong. But talking only goes so far. Deals carry much more weight, and SNC was lucky enough on Tuesday to announce a brand spanking new contract for the engineering, procurement, and construction management of Inmet Mining’s Cobre Panama copper project.
The contract fees total $355-million (U.S.), of which about $250-million will flow to SNC, comprising around 20 per cent of the company’s mining practice. SNC holds a 70 per cent stake in the project alongside partners Graña y Montero Group and Techint International Construction Corp., both of whom have 15 per cent a piece, and the EPCM contract covers about $3.2-billion of the Cobre Panama’s $6.2-billion total capital cost.
Realistically, this is just one project, so you’d be silly to put too much emphasis on it. But it does show that SNC can still win big contracts, and should remind you that investors may be freaking out just a tad too much.
To understand just how undervalued SNC is right now, AltaCorp Capital analyst Maxim Sytchev took a look at Shaw Group’s divestiture of its energy and chemicals group to Technip for $300-million, which was announced Monday.
This group’s revenue in fiscal 2011 totalled $593-million, putting the sale at about 0.5 times revenue and 0.9 times transactional backlog. At SNC, he calculated, if you strip out the 407 ETR, AtlaLink and $650-million of cash, the company’s engineering division is trading at 0.17 times backlog and 0.26 times revenue. Quite the difference.
If SNC can pump out a few more big name contracts, it may just give the market more confidence, and Mr. Sytchev said investors are quick to forgive embattled companies if they can rebound quickly. Just look at Wal-Mart, which is tied up in allegations of improper behaviour in Mexico. The stock initially plummeted, but has since recovered.
“As long as the companies continue to execute, win contracts and drive [earnings per share]progression, the market has a tendency to look through the difficult times,” he noted.
Update: a reader has raised some interesting counterpoints. First, comparing valuations in the E&C sector can be very tricky because pure engineering firms typically have higher valuations than construction firms. SNC is a hybrid so it's hard to tell where it lies.
Second, no one knows what the repercussions from the alleged bribery will be. German engineering group Siemens had to pay 2.5-billion euros to settle its bribery and corruption scandal. That would undoubtedly wipe out SNC's cash on hand, and then some.