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Follow highway toll road 407, investors SNC-Lavalin

Road signs for 407 photographed in January 2019.

Christopher Katzarov / Globus and Mail

Any investors who pounce on the beaten-up shares of SNC-Lavalin Group Inc. in the hope that the Montreal engineering and construction company will be acquired with a good premium, we must focus on the fact that its share in 407 Express paid routes may be worth something.

A rough estimate: according to analysts, it is about $ 28.50 per share. This is 76 percent of the current SNC stock price, which means that the rest of the SNC can be found per song.

The 407 ETR is an Ontario highway that extends 108 kilometers from Burlington to Pickering, which allows paid motorists to bypass the more congested arteries of Greater Toronto.

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The latest data confirms his success: the highway brought revenue of $ 382.7 million. United States in the third quarter ended September 30, 2018, which is 9.8% more than last year. Net profit amounted to 157 million dollars. United States, accounting for 41%.

Stakeholders of 407 people – SNC own a cut of 16.77 percent along with Cintra Global Holding Ltd. (a subsidiary of Spanish Ferrovial SA) and the Canadian Board of Investments in the pension plan – must be satisfied.

SNC, however, has long been promoting the idea of ​​selling part of its stake. In August, the company offered to reduce its share to about 10 percent, on the assumption that a partial sale could increase the cost of the toll road, enriching the interested parties.

No sale has been announced. However, the value of the share of SNC in 407 will be subjected to more thorough analysis now that SNC has encountered operational difficulties that have affected the price of its shares and raised questions about the future of the company.

On Monday, the SNC announced that it was writing off its oil and gas division of $ 1.24 billion after taxes. The unit is experiencing difficulties due to the deterioration of diplomatic relations between Canada and Saudi Arabia, where the SNC generated about 11 percent of its $ 9.3 billion. US annual sales in fiscal year 2017. Volatile oil prices also did not help.

Shares of the company on Monday fell by 28 percent, which amounted to $ 2.8 billion of its market value.

Analysts who once saw a promising rebound in the SNC, who struggled to resolve the weak cash flow and legal consequences of bribery in Libya in 2012, are now losing patience.

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Desjardins Securities has cut its stock target — or where they see stocks trading in the next 12 months — to $ 47 from $ 72 earlier. The brokerage company also changed its stock recommendation from “purchase.” Raymond James, Laurentian Bank Securities and BMO Nesbitt Burns also downgraded the stock.

However, the SNC share price recovered to $ 37.30 on Tuesday, which was 6.5%, which suggests that some investors see value here. Argument in favor of shares: if you deduct the share of SNC in the 407 paid route (and other concessions) from the share price, then the main engineering and construction business (E & C) is estimated at only $ 700 million, according to Maxim Sytchev, an analyst at the National Financial Bank .

"WITH [the earnings] along the trajectory that takes a step back, investors will put the name in the penalty area; that being said, taking away 30 percent of market capitalization [on Monday] too harsh, given the implied impasse of E & C, ”said Mr. Sychev in a note.

But there is a problem that stands in the way of turning SNC into an acquisition target: there is a lot of uncertainty in its core business. Profit falls, and SNC burns money. According to BMO estimates, the already narrow E-C business profit margin, based on adjusted earnings before interest and taxes, will drop to 4.2% in 2018 from 6.1% in 2017.

“Despite the fact that the assessment seems undemanding, we believe that the lack of control over profit indicators and increased financial leverage may hold back shares in the coming quarters,” noted BMO analyst Nesbitt Burns, Devin Dodge, in his article.

Moreover, SNC’s plans to sell part of its 407 stake, which some analysts believe could undermine the stock price, may be suspended: since SNC looks like a motivated seller, it may not be able to get the desired price.

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“As a result, we believe that there is a risk that the perceived need [SNC’s] the balance can affect the cost of applications, ”said Mr. Dodge.

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