SNC-Lavalin Group Inc.

• Numerous growth opportunities, both organically and through the integration of Atkins.
• Implementation of the deferred prosecution agreement could remove the regulatory overhang on the stock.
• Sale of a portion of Highway 407 represents an opportunity to unlock value.

SNC-Lavalin is a fully integrated professional services and project management company operating in over 50 countries, including Canada and the US. It has ownership in key infrastructure projects such as Highway 407 (16.7%) in the Greater Toronto Area. In June 2017, SNC acquired WS Atkins, a design, engineering and project management consultancy serving the infrastructure, transportation and energy sectors. On a pro forma basis, SNC generates 44% of its revenues from the Oil & Gas business, 30% from Infrastructure, 19% from Power (Nuclear and Clean Energy), 4% from Mining & Metallurgy and 3% from its Capital business. SNC has approximately 50,000 employees.

With the acquisition of Atkins, SNC was able to diversify its business away from reimbursable projects (42% of total revenues vs 60% previously) by entering the consultancy business (~28% of total revenues). The resulting business model should lead to higher multiples, in our view. On top of the diversification benefits, the acquisition is also expected to strengthen SNC's presence in the US infrastructure market. More specifically, Atkins already had sizeable resources in the country, which should help SNC generate cross-selling opportunities within its new global platform. Management remains on track to deliver C$120m of run-rate cost synergies by the end of 2018.

The company is well-positioned to grow revenues organically, thanks to the sizeable infrastructure opportunities in the Canadian P3 transportation market amid increased spending at the federal and provincial level. Meanwhile, SNC has also secured large contracts in its Power (fuel channel and feeder replacement contract for Bruce Power's Unit 6, John Hart generating station replacement project) and Oil & Gas (five-year framework agreement in Saudi Arabia to provide international engineering services, exclusive agreement to deliver the Advanced Topping Refinery in the UAE, a major project in Oman) divisions over the past 12 months, which materially improved their prospects. Moving forward, the company's record backlog of C$15.2b should continue to support both revenue growth and margin expansion.

The Canadian government's recent decision to implement the deferred prosecution agreement should eventually allow SNC to settle with the government and remove the regulatory overhang on the stock.

With 2Q18 results, SNC announced its decision to sell 6.76% of its investment in Highway 407 to unlock shareholder value (based on current estimates, we derive ~C$10.70/share although we believe our numbers are conservative). We welcome this decision, as we believe it will enable SNC to demonstrate the intrinsic value of the asset while maintaining a significant investment in it (~10%).

We derive our C$73 target from a sum-of-the-parts model which generates a value of C$42/share for SNC's E&C business and C$30/share for the Capital portfolio. At the current share price, the implied ~C$24/share value for SNC's E&C business represents ~7.7x our 2019 EPS estimate—a significant discount to peers at 12–14x 2019 EPS. Investors would also benefit from an attractive 2.1% dividend yield at the current share price.