SNC-Lavalin Group Inc.

SNC-Lavalin (Photo credit: Wikipedia)

SNC : TSX : C$44.84
BUY 
Target: C$50.00

COMPANY DESCRIPTION:
SNC-Lavalin is one of the leading engineering and construction groups in the world and a major player in the ownership of infrastructure, and in the provision of operations and maintenance services. SNC-Lavalin has offices across Canada and in over 35 other countries around the world, and its 24,000 employees are currently working in some 100 countries.
All amounts in C$ unless otherwise noted.

Investment recommendation
We reiterate our BUY rating and C$50.00 one-year target price on SNC shares after sponsoring meetings between institutional investors and Andreas Pohlmann, Chief Compliance Officer (CCO), and Denis Jasmin, VP, IR. Backstopped by $28.00 per share in hard infrastructure assets, we see a solid reward-to-risk value proposition afforded by SNC.
Investment highlights
SNC is building one of the most complete compliance programs in the E&C space. Believing that a culture of corruption violations begins at the top, SNC has effectively removed the root cause. The vast majority of the Board and senior management have been replaced and the CCO post has been established. The goal is to effect grass roots cultural change.
Management doesn’t expect a “material” cost increase due to this added layer of compliance infrastructure. Many of the existing employees in legal are being given additional compliance responsibilities.
SNC’s employee amnesty policy expires August 31, 2013. To date, no new information has been brought to light. However, most employees who will use the program are likely to wait until the last minute to do so, in our view.
SNC is subjecting itself to stringent diligence and screening. All new hires and appointments to the Office of the President will be screened by an independent third party. Additionally, a monitor has been installed inside SNC by the World Bank (as part of the Padma Bridge settlement).
We got the sense that management is working hard to settle corruption related criminal charges as quickly as possible (see our 9 Jan. 2013 Daily Letter for our estimate of what the monetary fine could potentially be). Once management knows the penalty/fine, and assuming it is manageable, we believe SNC will be more active on the M&A front (especially in O&G).
Our one-year target is based on 13x 2014E cash-adjusted E&C EPS, plus $28.00 for ICI and $3.00 in freehold cash.