Like Al Capp’s satirical comic strip character Joe Btfsplk, SNC-Lavalin seems to have a small dark rain cloud perpetually over its head. Joe was a well-meaning soul who seemed to bring disaster to everyone near him. Keith Farrant, portfolio manager at Claret Asset Mgt. Corp. in Montreal says it’s time to blow away SNC’s rain cloud. He rates this Canadian global stock a ‘best buy’.
Its former chairman was arrested on fraud charges. And two of its other senior execs left the company under a cloud. So, you might feel justified in rejecting Canadian global stock SNC-Lavalin Group Inc. (TSX─SNC) as a good investment.
Keith Farrant would tell you that you’d be wrong. Mr. Farrant is a senior analyst and portfolio manager at Claret Asset Management in Montreal. And he says SNC has made a lot of progress cleaning house after being rocked by bribery scandals a few years back.
Indeed, the engineering and construction giant has even set up a special ethics division, says Mr. Farrant, who notes that SNC’s main problem was that it got dinged in an industry that’s full of scandals and bribes anyway.
SNC acquires another multinational corporation
But SNC’s higher ethical profile is just one reason he likes the company. He also likes its purchase last August of Kentz Corp., an oil and gas engineering firm with offices worldwide.
For one thing, Kentz gives SNC heft in the all-important energy sector. Moreover, Kentz will likely account for most of the $1.45 a share in net income that SNC’s engineering and construction (E&C) division is expected to bring in this year, says Mr. Farrant.
And because this in turn assigns a low value to SNC’s other engineering and construction operations, investors effectively get those operations at a steal — no small matter, given the $8-$9 billion in revenue they bring in.
“If you buy SNC today, you’re getting very little value for the remainder of its E&C business,” says Mr. Farrant.
“If the E&C business was actually generating what it should be generating in net earnings per share, you’d have total EPS for E&C of roughly $2.50. So, you’re getting a bargain.”
SNC was able to buy Kentz after selling AltaLink, its wholly owned electrical transmission system in Alberta, to Berkshire Hathaway last December for $3.1 billion.
And although AltaLink is no longer part of the SNC stable, the company still owns a 16.8 per cent stake in Highway 407, the rapidly expanding toll road that crosses the Greater Toronto Area.
For Mr. Farrant, SNC-Lavalin is a best buy — one with a 12-month price target of $52-$64 a share.
Offices in 50 countries
One of Canada’s biggest engineering and construction firms, this dividend paying multinational corporation has offices in 50 countries. In Canada alone, the company has more than 400 projects on the go. Founded in 1911, SNC boasts expertise in infrastructure, mining, oil and gas and electric power.
For its second quarter, SNC’s net income rose to $53 million or $0.17 a share, from $52 million, or $0.21 a share, for the similar period in 2014.
Revenue, not surprisingly, was also higher, rising to $2.3 billion from $1.7 billion, although gross margin was lower, sliding to $302 million from $349 million.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •9/9/15 •