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SNC-Lavalin shares jumped 29 per cent on Dec. 19, after investors learned the plea deal involved a mere $280-million wrist-slap.Dario Ayala/The Globe and Mail

If you regret not buying SNC-Lavalin Group Inc. shares at their lows last year, before a division of the Montreal-based engineering firm struck a plea deal to resolve a criminal case against it, sending the share price soaring, here’s an upbeat idea: Big gains are still ahead.

That might sound surprising given the share price has doubled since early September, when it traded at a beaten-up low of just $15.50, weighed down by dismal financial results and uncertainty related to charges involving its former operations in Libya.

The shares jumped 29 per cent on Dec. 19, after investors learned the plea deal involved a mere $280-million wrist-slap. They rallied the next day, too, to a close of $30.51.

Over the past six weeks, though, SNC-Lavalin shares have been coasting – they closed at $30.54 on Wednesday – which suggests that some investors are waiting for further developments. What should they expect?

One boost to the share price could come from shedding businesses that are no longer deemed particularly important or take the company to areas of the world that are too unstable, such as the Middle East.

No wonder analysts took note when the company announced this month that it had added Louis Véronneau to its senior leadership team.

Mr. Véronneau was appointed to the newly created role of chief transformation officer, putting him in charge of simplifying the company’s structure. What’s notable here: He previously worked at Bombardier Inc., where he oversaw deals to sell a 30-per-cent stake in Bombardier Transportation to Caisse de dépôt et placement du Québec and the C Series program to Airbus.

“Overall, we are pleased with the announcement as it demonstrates management’s commitment to accelerating SNC’s transformation as an engineering services firm to unlock shareholder value,” Benoit Poirier, an analyst at Desjardins Securities, said in a recent note.

SNC shares could also get a lift from signs of improving cash flow.

Maxim Sytchev, an analyst at National Bank Financial, pointed out that cash generation is becoming increasingly important in the engineering and construction sector as the business cycle ages and investors react to the occasional recession warning.

Mr. Sytchev noted that companies such as WSP Global Inc., Toromont Industries Ltd. and Stantec Inc. benefit from consistent free cash-flow generation, making them his top picks for 2020. But SNC-Lavalin, which has been bleeding cash, is also a top pick because he expects the company in 2020 and 2021 will convert more profits into free cash flow.

“Assuming no execution hiccups on legacy fixed-price contracts [or contracts where SNC is responsible for cost overruns], we see tremendous value in ‘good’ parts of the business, i.e., engineering, design and project management, nuclear and concessions,” the analyst said in a note this month.

He expects that SNC shares can rally to $42 within 12 months, which would be gains of nearly 38 per cent.

Third, consider that SNC shares are still cheap compared with many peers. Valuations in the global engineering and construction sector are reaching record highs, according to BMO Nesbitt Burns, with estimated price-to-earnings ratios well above 10-year averages.

But Yuri Lynk, an analyst at Canaccord Genuity, noted that individual valuations for Canadian companies are either very expensive or very cheap, and SNC falls in the latter group.

“Our top pick, SNC, is a turnaround story where we see tremendous valuation upside potential associated with management’s recent refocusing of the business,” Mr. Lynk said in a recent note in which he raised his 12-month price target to $43 from $42.

He estimated that SNC’s engineering and construction business trades at just nine-times estimated 2020 earnings per share, which is a bargain next to the peer average price-to-earnings ratio of 17.2. He expects that SNC’s P/E ratio will recover to 15.

Lastly, consider that one of the biggest institutional investors in SNC-Lavalin is staying put. Jarislowsky Fraser, the Montreal-based investment management firm, is maintaining a 10.8-per-cent stake in the company as it transforms itself into a more predictable business with visible cash flows, and moves away from construction and toward engineering design and project management.

“When we look three to five years out, we see a company that is going to be pure design,” Charles Nadim, manager of the Canadian equity portfolio at Jarislowsky Fraser, said in an interview.

“By 2024, there should be no more construction risk in this company,” he added, as SNC works through existing contracts. “It’s going to be a company that goes from not producing any cash today, to around 80 per cent free cash flow conversion.”

Using a conservative scenario over the next three to five years, Mr. Nadim thinks the shares will trade at between $45 and $50.