There may have been no worse time to join SNC-Lavalin Group’s executive ranks than 2013, when the venerable Montreal-based engineering and construction firm was embroiled in a shocking bribery scandal. Yet that’s when Neil Bruce came aboard as head of the resources and mining division. With a 30-year career at various energy and infrastructure companies, Bruce could have taken a job almost anywhere, but he chose embattled SNC. “The company had all of the building blocks in place to become an absolute top-tier engineering and construction business globally,” he says. “I was presented with a great opportunity.”
Bruce, who became the company’s CEO in 2015, says the legal issues didn’t faze him, even though they were significant. They started in 2011, when news broke of a vice-president being investigated on a bevy of fraud- and corruption-related charges (he eventually pleaded guilty). Then, in March 2012, CEO Pierre Duhaime abruptly resigned. He was arrested the following November on charges of fraud, conspiracy to commit fraud and the use of false documents; his case is still before the courts. More scandal followed in 2013, when former executives of SNC were accused of providing a $22.5-million payment connected to the construction of the McGill University Health Centre that was sent to the hospital’s former head. The hospital executive died before he could stand trial, but his wife pleaded guilty to money laundering.
Naturally, investors sold the stock in droves. SNC shares bottomed out at $37 in January 2016, down from a high of around $61 in February 2011.
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Unlike some of Canada’s past corporate miscreants, however, the Montreal-based firm didn’t disappear. Over the past six years, the entire executive team has changed. SNC has also stopped doing business in some countries, such as Libya, where it was charged with trying to bribe a public official. The construction giant has mostly cleansed its pipeline of dubiously secured projects, and in the past few years, Bruce has been trying to rebuild the company’s reputation and refocus on growth.
Last year, SNC increased its revenue by 12% to roughly $9.5 billion, thanks to its $3.6-billion acquisition of British engineering firm WS Atkins and a strong infrastructure market. That’s good enough to move the company up four spots on our list. It is also once again popping up on lists of top stocks. Canaccord Genuity analyst Yuri Lynk says SNC is his No. 1 industrial sector stock this year. He has a 12-month price target of $73, well above the shares’ current mid-$50s level. “They’ve transformed the company from one that was having trouble executing and beating quarterly expectations to one that’s actually generating well above their peer group on invested capital and earnings growth,” Lynk says.
If SNC manages to hit Lynk’s mark, it would be the highest price its shares have ever fetched. But the company has a long way to go. First, it must deal with outstanding corruption and fraud charges related to its business in Libya, which continue to be a drag on its stock price and may be hurting international opportunities, says Bruce. “It’s affected us less as time has gone on, but it’s still a reputational business, and we still get clients asking us when this is going to be resolved.”
Bruce hopes a planned change to Canadian law will help put the issue behind him. Unlike many other Organisation for Economic Co-operation and Development nations, Canada doesn’t have deferred prosecution agreements (DPA), which allow companies to settle cases without admitting wrongdoing. In its last budget, the federal government announced its intention to introduce DPAs, but it could be several months before they come into force. When they do, Lynk expects SNC to pay about $200 million to settle the charges, which, while not inconsequential, won’t have much impact on the company’s finances, he says.
Aside from the legal issues, Bruce’s other priority is to deliver more consistent results. SNC has missed analysts’ earnings expectations several times in the past few years, in part because it stopped doing business in some countries. The company did beat expectations last year and had a strong fourth quarter. Now Bruce must convince shareholders this wasn’t a fluke. “We have to keep showing proof,” he says.
Barring new setbacks, SNC’s stock is poised to climb, as strong sector fundamentals and a greater emphasis on highly profitable areas of business, such as consulting, should meaningfully increase earnings, says Maxim Sytchev, an analyst with National Bank of Canada. He believes SNC is in much better shape than it has been in years. Since Bruce took over, the company has beefed up its engineering business, which is less risky than its construction operations. With Atkins, it will get more access to projects in Europe and can rely on the British firm’s large presence in the transportation sector—a key focus for SNC. “It gives us capabilities we didn’t have,” says Bruce.
In addition, the company has exited some less profitable operations, such as its real estate facilities-management business. SNC has also emerged as a leader in public-private partnerships (P3s), in which companies help finance infrastructure projects and then share in the returns. Its best-known P3 project, Ontario’s Highway 407, has been a massive success that Sytchev estimates accounts for $30 of SNC’s share price.
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With infrastructure spending expected to pick up around the globe—Global Infrastructure Hub projects the world needs to spend $94 trillion (U.S.) on upgrades by 2040—more big contracts will likely come SNC’s way. The firm has also been able to take advantage of increased infrastructure spending in Canada, at both the provincial and federal levels. SNC has won several multibillion-dollar contracts at home, including the $6.3-billion deal to build the Réseau Express Métropolitain light-rail system in the Montreal area, and its strength in transit puts it in a good position to benefit from subway and light-rail upgrades in Canada and elsewhere. All of this contributes to Lynk’s bullish outlook. “I’ve followed the sector for 10 years, and I’ve never seen a bid pipeline like we have today, especially in transit,” he says.
Despite what some see as the company’s strong prospects—all 11 analysts who cover the stock have a buy or strong buy rating on it—SNC’s shares are trading at 11.5 times Lynk’s 2018 earnings estimates of $2.75 per share, while the company’s peers are trading at about 16 times earnings. The discount, says Lynk, is due to the legal problems and worries over whether SNC will complete its work on Montreal’s new Champlain Bridge on time (Bruce insists it will).
Those who believe that SNC-Lavalin is once again a reputable business and that the infrastructure space will heat up over the next several years may want to buy in now. Investors remain skittish, but they may not be for long. “It’s still a ‘show me’ story, and investors would rather miss out on the first 10% move [up] because they don’t want to take the risk,” says Lynk. “But this is a pretty compelling stock.”