Morningstar | We Reduce our FVE for SNC-Lavalin due to Possible Fallout from Legal Ruling. See Updated Analyst Note from 10 Oct 2018
After no-moat engineering and construction company SNC-Lavalin announced that Canadian prosecutors declined to negotiate a remediation agreement for certain legal charges, we are lowering our fair value estimate to CAD 51 from CAD 61. The company is facing bribery and corruption charges that were laid in 2015 against former employees related to projects in Libya. If found guilty, SNC could face a fine and be disbarred from bidding on Canadian government contracts for a period of 10 years.As we do not expect the fine to exceed CAD 200 million, the impact of potential fines on our fair value estimate is only CAD 1 per share. The real risk is potential disbarment and damage to the company’s reputation if SNC were to be found guilty, which could impair its growth potential. While the outcome of the court decision may remain uncertain for several years, in our base-case scenario we assume a 7.5% decrease in revenue in 2020, and we estimate the decrease in revenue could be as much as 15% in our bear-case scenario if the company were to be disbarred from bidding on government contracts in Canada.
In its 2017 Investor Day presentation, management emphasized infrastructure and transportation projects in Canada as a key focus area over the next few years, and government projects constitute a significant portion of those potential investments. Management expects the Canadian federal government’s spending budget to be approximately $120 billion during the next decade and the aggregate provincial spending budgets of Alberta, Ontario, and Quebec to exceed $250 billion during the same period. SNC’s ability to fully capitalize on this opportunity might be at risk.
SNC-Lavalin Group is an engineering and construction group, and is engaged in the ownership of infrastructure and in the provision of operations and maintenance services. Co.'s segments are: mining and metallurgy, which provide tailored solutions for projects in the aluminum, gold, copper product sectors, among others; oil and gas, which includes projects for oil and gas and resources companies; power, which includes projects and services in hydro, and nuclear and thermal power generation, among others; infrastructure, which include infrastructure & construction, and operations and maintenance; capital, which invest in equity or subordinated debt into projects for public services.
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