BUSINESS

SNC-Lavalin's low share price buying opportunity for patient investors: analysts

08/27/2013 05:05 EDT | Updated 10/27/2013 05:12 EDT
MONTREAL - SNC-Lavalin's main engineering and construction business is expected to remain volatile for some time, but the time may be right to buy shares in the embattled company, industry analysts suggest.

Frederic Bastien of Raymond James says the company's thriving infrastructure and concessions business will help limit any further slide. The division invests in such assets such as Toronto's Highway 407 toll road, AltaLink transmission lines in Alberta and the Montreal super hospital.

"Consequently, we are of the view that patient investors will be amply rewarded for buying it at current levels," he wrote in a report.

SNC's (TSX:SNC) shares closed at $39.55, down 43 cents in Tuesday trading on the Toronto Stock Exchange. They have fallen 20 per cent from its 52-week peak reached after rallying from months of negative headlines about corruption allegations involving former top officials.

Bastien, a Vancouver-based analyst, said a small South American energy contract announced Monday and a deal announced earlier this month for engineering work for MEG Energy's central processing facility in northern Alberta are positive signals for the SNC-Lavalin division that has suffered recent setbacks. These include a claim for late penalties on a large gas processing complex in Algeria and a dwindling order book.

"They also speak, in our view, to SNC's sustained efforts in delivering on its resources strategy."

Analyst Maxim Sytchev of Dundee Securities said the announcement Monday of a contract in Colombia "doesn't move the needle" for SNC-Lavalin considering its backlog as of the second quarter was US$9.7 billion. Although the contract is believed to be worth US$55 million, the company will likely only receive US$25 million to US$35 million after equipment costs, he says.

Still, he says the South American deal highlights that the company continues to win work amid unprecedented turmoil.

Sytchev says the company's focus on reducing administrative costs and the impending completion of difficult projects should improve future results.

He says it's "simply not tenable" that SNC-Lavalin's shares continue trading at a substantial discount to its peers.

"Large discrepancies tend not to last in the public markets for a very long time," Sytchev wrote. His price target is $52.

At its current share price, SNC's core engineering and construction business is valued at just $6.56 per share, down from $30 to $35 in years past. He said the operations will eventually shine through and be helped by a resolution of ethical issues.

"Nothing lasts forever, even the bad times."

Analyst Pierre Lacroix of Desjardins Capital Markets said SNC-Lavalin could produce a "sizable upside surprise" in coming quarters if there is a partial reversal of $170 million of provisions taken in the first half of the year for a handful of troubled projects.

"Expectations could reach a sweet spot that could better position the company to surpass expectations," he wrote following release of disappointing second-quarter results earlier this month that included a lower guidance for the year.

"In our experience, these windows have been timely opportunities to add to positions in SNC," Lacroix wrote.