GABRIEL LOWENBERG. Special to The Globe and Mail, Published Monday
We all encounter minor irritations in life. Here’s one of mine: Three price increases in a row for three consecutive years.
On a recent trip to Toronto, I took the 407 toll highway north of the city. Subsequently, I received my e-mail invoice, informing me that the amount owing had been dutifully deducted from my credit card on file. The consortium that owns the 407 had already raised prices in 2014, 2015 – and now again.
Any company that can increase prices three years in a row is worth researching as a stock to own.
Such an investment, of course, would not be a pure play on the 407. SNC-Lavalin Group is an engineering and construction powerhouse, with more than 40,000 global employees and multiple areas of expertise.
Mindful that no return comes risk-free, here’s my thinking. Let’s not be distracted by SNC’s ongoing legal issues, which will play out over time and on which I am not qualified to offer an opinion. What I’m looking at is the treasure trove of corporate assets that could be sold and have already been sold, substantially above book value.
For example, AltaLink, the Alberta power-transmission facility, sold for $3.1-billion in December, 2014. SNC’s book-value gain: $1.3-billion.
The list of projects SNC-Lavalin has bid on or is currently completing, which is frankly gargantuan. The value of SNC’s backlog stood at a record $12.7-billion as of September, 2015. Let’s remember as well that the new federal Liberal government is intensely focused on infrastructure, having pledged to commit $125-billion over 10 years. I have no doubt that SNC, a domestic success story will receive more than its pro-rata share of the spoils.
But let me return to the crème de la crème asset that remains to be monetized – SNC’s equity position in the 407. I love the tolling business and so do others. For me, three price increases in a row – boosting its already software-sector profitability – is window dressing, which is generally done just before an asset sale.
So what is the 407 ETR worth? In 2010, the Canada Pension Plan Investment Board paid 30 times the forward-year EBITDA for a 10-per-cent equity ownership for the benefit of all Canadians. (EBITDA represents earnings before interest, taxes, depreciation and amortization.) Currently, the ownership is roughly 40 per cent CPPIB, 43 per cent Ferrovial SA and 17 per cent SNC. Using the same 30 multiple today, I estimate, in line with Street analysts, that SNC’s equity ownership to be worth roughly $3.7-billion pretax. That is about $25 a share.
However, what is interesting is that a sell-side analyst who covers Ferrovial out of Europe thinks the 407 ETR could be worth double what the Canadian analysts have in their model, upward of $40 per share. What is the difference in assumptions between the Canadian analysts and the European analysis on the same asset? The number of years going forward that there will be a 10-per-cent increase in the toll per annum. The 407 ETR has a pricing model similar to an airline or Uber, with peak pricing segmented by weight and time, so exact numbers are hard to pin down. However the 10-per-cent-per-annum increase is very close to reality for the past several years. If the Ferrovial analysis is correct, you get the rest of the business (SNC trades in the $40 range), the entire 40,000 employees, the global engineering and construction business plus all the other assets and cash for free.
So what is the catch? When AltaLink was sold in 2014, SNC acquired Kentz, an international engineering and construction company focused on the oil and gas sector. I need to remind no one what the price of oil has done since 2014. Obviously, the pipeline of opportunities in the oil and gas sector globally, and SNC’s oil and gas specific backlog, has also likely meaningfully decreased. It is my opinion that Kentz itself will bleed cash until the oil and gas cycle turns. Just don’t forget that there’s a reason they call it a cycle: After the down, there is an up.
I believe the headwinds posed by SNC’s ongoing legal issues are manageable. Here’s why: One, the Caisse de dépôt et placement du Québec owns just under 13 per cent. Two, SNC has instituted major reforms in compliance. Three, Ottawa wants to stimulate the economy with domestic infrastructure projects and that does not include shutting down a Canadian success story – a century-old Quebec-based company with long-standing roots in the community. With all of this in mind, I own SNC for my clients.
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Gabriel Lowenberg is CEO and president of Lowenberg Investment Counsel, Inc. (LICi), an independent wealth investment management firm, which owns SNC-Lavalin for the benefit of its clients.