SNC Rebounds as Trudeau Readies $95 Billion Canada Building Jolt

  • ‘There’s more upside here’ even after rally, Scotiabank says
  • Analyst sees C$16 billion pipeline of transportation projects

SNC-Lavalin Group Inc., the Canadian construction company that spent decades building roads, smelters and power plants from Alaska to Australia, has its sights on a piece of the C$120 billion ($95 billion) infrastructure spending boom planned in its home country.

At least 10 rail and public transit projects in cities from Toronto to Calgary are in the planning stages, turning Canada into an “incredible market,” according to Ian Edwards, president of SNC’s infrastructure unit. The company has the expertise for such contracts, having built systems such as the Canada Line rapid-transit project in Vancouver.

The spending boost by Prime Minister Justin Trudeau is adding to investor optimism that SNC Chief Executive Officer Neil Bruce will almost double the pretax profit margin to 7 percent in the engineering and construction unit by the end of next year. The builder climbed last week to the highest since September 2014, when shares started a long decline because of weak results and tumbling oil prices.

“There’s more upside here,” Anthony Zicha, an analyst at Scotiabank, said by telephone from Montreal. “I don’t think the stock reflects the potential of future infrastructure contracts that SNC is going to bid on.”

SNC has climbed 25 percent this year to C$51.35. That’s three times the gain of the S&P/TSX Composite Index and double the advance of the nearest construction rival, Aecon Group Inc. SNC had earlier been tarred by a corruption scandal involving former CEO Pierre Duhaime, who quit in March 2012 and was later charged with fraud. He’s still awaiting trial and none of the allegations have been proven in court.

SNC is among the finalists to build the Gordie Howe International Bridge between Detroit and Windsor, Ontario, which may carry a price tag of more than C$4 billion. It’s also in the running for the Toronto area’s Finch West light-rail transit system, which is valued at about C$1.2 billion by Yuri Lynk, an analyst at Canaccord Genuity.

In all, Montreal-based SNC could bid on at least C$16 billion of work in its home country, Lynk said.

“The next decade in Canada is really all about transport infrastructure -- it’s rail, it’s road, it’s replacement of bridges,” Edwards said in an interview at SNC headquarters. “Over the next 10 years you should see an almost exponential increase in spending.”

Trudeau’s infrastructure pledge includes about C$12 billion in new cash over five years for quick turnaround projects such as public transit upgrades, investments in water systems and affordable housing. The government will begin spending on longer-term projects -- what it calls Phase 2 of its plan -- starting in 2018, with new expenditures peaking in 2025 at almost C$10 billion.

For SNC, infrastructure generated first-quarter sales of C$577 million, or 29 percent of revenue. About 41 percent of the company’s backlog of future work, or C$5.5 billion, is tied to the unit that Edwards runs.

‘Robust Pipeline’

SNC will have to fend off plenty of rivals. WSP Global Inc. plans to bid on future contracts and transport projects are “right in our sweet spot,” said Isabelle Adjahi, a spokeswoman for the Montreal-based company. Spain’s Acciona SA, Toronto-based Aecon and Stantec Inc. of Edmonton, Alberta are also among the likely participants, according to representatives for the companies.

“There’s a very robust pipeline of projects here, particularly in the transportation sector,” Darren Sokoloski, who runs Acciona’s Canadian infrastructure operations, said from Vancouver. “When you put everything together it’s not hard to get to C$15 billion or C$20 billion worth of projects. We are following everything with great interest.”

Aecon is “well positioned to successfully bid on, secure, and deliver” infrastructure projects in Canada, “and this is expected to lead to ongoing growth in this segment in 2016 and 2017,” CEO Teri McKibbon said in an e-mail message Friday.

The focus on Canada doesn’t mean SNC is giving up on projects abroad. Opportunities also exist in the Middle East as well as the U.S., Edwards said.

Montreal Rail

Still, one of the biggest prizes will be right in the company’s backyard: a C$5.5 billion light-rail system being planned in Montreal by the Caisse de Depot et Placement du Quebec. The Caisse, Canada’s second-largest pension fund manager, is seeking permission to build the 67-kilometer (42-mile) network, provided the federal and provincial governments both chip in.

With construction set to begin next year, Edwards said his company wants to bid for the work -- especially since the proposed route would cross the Champlain Bridge, which SNC is building.

“It’s a great job,” Edwards said of the Caisse’s proposed rail system. “We’re really interested in it. It’s in our home town, so we’re going to put a good consortium together for that.”

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