A year ago, SNC-Lavalin Group Inc. (TSX:SNC) shares were reeling, falling below $40 each.
The company was suffering from a pretty major scandal. According to RCMP charges, it paid some $47 million in bribes to get contracts in Libya and then defrauded the country out of $130 million after it got the work.
That was just the latest in a long series of bribe allegations. Over the years, similar allegations have come up with projects in Mexico, Bangladesh, and close to home in Montreal. Each time, the charge is the same. SNC execs show up, chequebook in hand, willing to grease the hand of local politicians in order to get some lucrative new construction contract.
Investors were particularly concerned after the Libya investigation came to a head. If the RCMP officially charged the company with the crime, it would be shut out of bidding on federal government contracts for a decade.
This didn’t happen, of course. SNC’s management team is too smart for that. Instead, the company made a number of moves designed to appease investigators, including replacing several members of its management team, paying a fine to African authorities, and cooperating with authorities who charged former employees with wrongdoing.
The newest scandal
Management pledged the new SNC-Lavalin was scandal free, and that the company’s new direction was to avoid these kinds of issues at all costs.
Perhaps this is true, but old allegations keep coming back to haunt the company.
On September 8, the Commissioner of Canada Elections announced it and SNC-Lavalin had entered into a compliance agreement regarding illegal contributions made to both the Liberal and Conservative parties during elections between 2004 and 2011.
At least these illegal contributions stopped back in 2011, and if there was a fine paid, it doesn’t appear to be material. The offending political parties were forced to forfeit the donations, however.
This kind of news matters for one very important reason. Scandals and SNC-Lavalin keep finding their way into headlines together. Who knows what kind of issues are hiding in the shadows? Do investors really want to take that risk?
Investors have liked SNC-Lavalin over the last year; shares have rallied more than 40%. They recently surpassed $55.
The company trades at a 16.7 times trailing P/E ratio, which looks pretty reasonable on the surface. But 2016 earnings are expected to decline to $2.15 per share, putting shares at more than 25 times forward earnings. And 2017’s projected earnings are $2.47 per share.
One of the reasons why investors are assigning the company a higher forward earnings multiple is they’re excited about proposed infrastructure spending by Justin Trudeau’s Liberal government. SNC has long been the federal government’s project manager of choice.
But at the same time, it’s likely some of Canada’s smaller construction companies will benefit from this as well. And yet Canam Group Inc. (TSX:CAM) has fallen by nearly a quarter over the last year, and it trades at less than 10 times 2017 earnings estimates. Additionally, recent revenue and backlog results have been encouraging.
The biggest difference between SNC-Lavalin and Canam is the taint of scandal. A quick internet search for SNC-Lavalin has a front page full of transgressions. A similar search for Canam comes back empty.
There is obviously more to the Canam vs. SNC debate than corruption allegations. Canam is having some major temporary problems, which include having to take a $32 million provision on a recent project. But for many investors–myself included–SNC’s history of corruption makes it almost uninvestable. That’s the big issue, and, unfortunately, it doesn’t look like this is going away.