enough said:
Abstract:
• SNC’s EV/Backlog Metric at an Historical Low: SNC’s EV/Backlog metric now
stands at a mere 0.4x, compared to a long-term median of 0.71x. During the dark
days of the recession and subsequent tentative recovery, the metric did not dip
below the 0.7x mark (the last time the EV/Backlog ratio was at a similar level
was December 2005). We like using the metric because there is no forecasting.
• SNC is Also Decoupling from Commodities: SNC’s exposure to oil is primarily
through its Hydrocarbons & Chemicals division, which in 2011 comprised 15% of
the company’s top line. SNC's presence in oil-driven locales such as Alberta,
North Africa, Venezuela, and Russia suggests that its oil exposure is actually
greater than the aforementioned 15%. This explains the tendency of SNC’s share
to move in lockstep with oil price (65% correlation). The recent divergence
(starting in Late January) we are witnessing between SNC’s share and oil price
is therefore uncharacteristic. We observe a similar decoupling trend with share
price performance and the return on a blended commodity index. Historically,
the two series exhibited strong correlation (97.6%).
• Valuation & Recommendations — We See Deep Value at These Levels: With all
metrics pointing to value and a likely un upward price correction over the next
3-6 months, we believe this is the best time to step into the name since the
financial crisis. While we acknowledge there are operational issues to be
addressed such as ensuring the recovery of the Infrastructure and Hydrocarbons
& Chemicals divisions, we feel that the dire scenario that the market was
assuming is simply not happening. With the shares trading at 9.7x 2012
estimates, SNC is still 400 bps BELOW the U.S. peers in a cyclically
strengthening environment. We fully subscribe to the history repeating itself
scenario – the company will continue to win new work and its trading multiples
will recover. We reiterate our Outperform rating and $56.00 target on SNC
shares.