SNC-Lavalin is a risky bet that could pay off big despite scandal with Trudeau

SNC-Lavalin is in the middle of a political firestorm that could give opportunist investors a chance to pick up shares on the cheap — but buyers beware, because this is a company that comes with a lot of baggage.

Veterans Affairs Minister Jody Wilson-Raybould is quitting the federal cabinet just days after a Globe and Mail report said that the Prime Minister’s office pressured her when she was justice minister to arrange a deal for SNC-Lavalin (SNC.TO) to avoid a criminal trial for fraud and corruption charges related to business in Libya.

Wilson-Raybould has hired a former Supreme Court judge to advise her on what she can publicly say about “matters that have been in the media over the last week.” Prime Minister Justin Trudeau has denied the Globe’s story and says he “welcomes” an ethics commissioner probe.

For now, there are more questions than answers about the Montreal-based engineering giant.

“We tend to believe where there is smoke, there is fire, and there seems to be a lot of smoke at SNC right now,” Ryan Modesto, CEO at 5i Research, told Yahoo Finance Canada.

Even if the courts don’t throw the book at SNC-Lavalin, Modesto says the company has other problems.

“They are having some serious issues with the mining business and this is hampering results,” says Modesto.

“The missteps and overall poor performance over the last five years, we think, will make SNC more of a show-me story and markets will not pay a whole lot of attention to the name until they can clearly show they are putting these issues behind them and what the full impacts will be.”

A buying opportunity?

Benj Gallander, president of Contra the Heard Investment Letter, looks for deeply discounted and beaten down companies to invest in.

“SNC-Lavalin could prove to be a great contrarian play. (It is) worth noting is that it is trading near a 10-year low and is almost half of where it traded in the past 52 weeks,” Gallander told Yahoo Finance Canada.

But Gallander isn’t ready to jump in head-first.

“Personally though, I think that it would be prudent to be patient and wait to invest in this company. There is likely lots of additional news that will surface,” says Gallander.

Darren Sissons, a portfolio manager at Campbell Lee & Ross, says his firm is a buyer of SNC-Lavalin. He says that based on analyst estimates of SNC-Lavalin’s stake in the Highway 407 ETR, the toll-road that runs through the Greater Toronto Area, and other areas of its business, the stock is “extremely discounted.”

“Despite the political interference and the recent scandal involving the Prime Minster we believe there is significant value to be unlocked and sizeable share upside moving forward,” he said.

SNC-Lavalin’s stock is down around 26 per cent so far in 2019.

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