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Jan 29, 2019

'Market is overreacting': Why SNC bulls are standing by the firm

Why some analysts are upgrading SNC despite the selloff


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Shares of SNC-Lavalin Group Inc. (SNC.TO) plummeted almost 28 per cent on Monday after the company reset earning expectations amid a problematic mining contract and fallout from souring Saudi-Canada relations. It was the latest setback for a company that’s still struggling with the overhang from a years-old corruption scandal. 

While the latest disappointment was enough to compel at least three analysts to downgrade their recommendations to hold from buy (including BMO Capital Markets Analyst Devin Dodge, who told clients the “foundation for bull thesis continues to crumble”), the majority of analysts who cover the company still recommend clients buy its stock.

Here’s why some SNC bulls are refusing to throw in the towel (and why there’s a new bull in the mix):  

“We fear the stock may be ‘range bound’ for the foreseeable future as confidence in management has suffered a serious setback. Investors' estimates of the company's earnings potential in an environment where resource clients, not E&C companies, clearly hold pricing power needs to be materially lower, in our view … As BUYers of the stock, we can only take solace in the appearance that there is a lot of bad news priced-in at current levels and be patient.”

-Canaccord Genuity Analyst Yuri Lynk. Recommendation: Buy; Price target: $44.00

“While the announcement [Monday] was disappointing as these were the types of risks management had been indicating its processes had under control, we still believe it’s important to keep valuation in context, particularly with current share prices implying the core engineering and construction business trades as 2.5x and 2.2x our 2019e and 2020e earnings.”

-AltaCorp Analyst Chris Murray. Recommendation: Outperform; Price target: $58.00

“SNC still does not have closure on legal issues that occurred under the previous management team. This has led to the valuation discount and share price underperformance. However, we were able to get enough comfort around these risks and have factored them into our price target. The key is that as these issues are resolved, then the overhangs on the SNC shares are, in our view, likely to turn into positive catalysts that should lead the shares to re-rate higher.”

-RBC Capital Markets Analyst Derek Spronck. Recommendation: Outperform; Price target: $48.00

'We have to be objective' about SNC warning: Sytchev

Maxim Sytchev, managing director of industrial products at National Bank, explains why he still rates SNC-Lavalin as an outperform after the company warned of a "serious problem" in its mining and metals division.

“You look at the worst-case scenario. One third of the market cap was gone, and you get the core E&C business almost for free. So, at $35 (share price), it’s probably overdone. … At $35, the market is overreacting.” 

-National Bank Analyst Maxim Sytchev. Recommendation: Outperform; Price target: $62.00

“While we reduced our 2019/2020 EBIT estimates by 20%/15%, and lowered our one-year target to $49/share, we view the decline in the share price as overdone. … We also see the potential for upcoming catalysts on the name – including potentially better-than-feared/implied 2019 guidance, and a partial monetization of the 407.”

-Scotiabank analyst Mark Neville. Recommendation: Sector outperform; Price target: $49.00

“With a federal election looming in October 2019, and growing negative sentiment in Western Canada, the Liberals will need Quebec's support in the next election. Given the importance of SNC as an employer and that much of the recent share price downdraft has been a direct result of worsening Canada/Saudi relations and the failed [deferred prosecution agreement] review, we suspect there will be pressure to find common ground for the DPA appeal (which would help relieve some of the overhang on the E+C business).”

-CIBC Capital Markets Analyst Jacob Bout. Recommendation: Outperform (from neutral); Price target: $49.00

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