SNC-LAVALIN GROUP INC. (Toronto symbol SNC; www.snclavalin.com) is a leading Canadian engineering and construction company that specializes in large-scale public works projects, such as roads, bridges, transit systems and water treatment plants. SNC has offices in over 40 countries.
The company’s revenue fell 15.7%, from $7.1 billion in 2008 to $6.0 billion in 2010. However, revenue rebounded to $8.1 billion 2012.
Even with the lower revenue, SNC’s earnings jumped 52.7%, from $2.05 a share (or a total of $312.5 million) in 2008 to $3.13 (or $476.7 million) in 2010. That’s mainly due to stronger earnings from its investments in concessions, which are rights governments grant to run public facilities. SNC’s concessions include its 16.77% stake in Highway 407, a toll route north of Toronto, and wholly owned AltaLink, which transmits electricity in Alberta.
However, older fixed-price contracts prevented the company from passing along unexpected cost increases to its clients. As a result, its earnings fell to $2.04 a share (or $309.1 million) in 2012. Restructuring costs and other unusual items likely cut SNC’s earnings to just $0.25 a share in 2013.
The stock dropped from over $60 in 2011 to $34 in September 2012 following the discovery of $56 million U.S. in unusual payments SNC made to help win Libyan construction contracts. Allegations that it used bribes to win contracts in Quebec also hurt its reputation.
Canadian stocks: SNC Lavalin unlocks hidden value with sale of some smaller investments
SNC responded quickly to these potentially damaging developments, replacing most of its senior executives, including its CEO, and strengthening its oversight procedures. As well, the company’s new management is focusing on contracts with better profit potential.
The company is now unlocking hidden value by selling some smaller investments. For example, it recently sold most of its minority stake in a New York State power plant for $82.4 million U.S. It also plans to sell AltaLink, probably through an initial public offering. The company will likely use the proceeds to expand its oil and gas, mining and water-treatment businesses.
SNC’s long-term debt of $3.4 billion is 48% of its market cap. However, $3.1 billion of this is non-recourse debt related to its concession investments and secured by specific assets. That limits SNC’s liability for these loans. The company also holds cash of $797.7 million, or $5.26 a share. The $0.92 dividend seems safe and yields 2.0%.
In the latest edition of The Successful Investor, we look at whether SNC Lavalin can restore its profit growth in 2014. We conclude with our clear buy-sell-hold advice on the stock.
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