Desjardins Analyst: SNC Lavalin Contract a Positive, Despite Falling Shares

Sep.16.08 | About: SNC Lavalin (SNCAF)

On a day when the Toronto market is down more than 400 points, SNC Lavalin Group Inc.'s (OTCPK:SNCAF) juicy new contract announcement hasn't been enough to lift shares higher.

Nonetheless, Desjardins analyst Pierre Lacroix said:

It should have very positive implications to the engineering company's bottom line.  

SNC shares have fallen 2% or C$0.79 to C$43.26 in afternoon trading, after the company said earlier in the day it has been awarded a C$500 million contract to build a new airport in Libya.

Mr. Lacroix said:

The contract, which is expected to be delivered by 2010, will fall under the 'package' umbrella (normally lump-sum, fixed-price contracts); notably, however, it will be performed on a cost-plus basis, eliminating the cost risk to SNC.  We understand this is one of the largest package/cost-plus contracts ever undertaken by the company. Historically, package contracts yield gross margins between 8% and 10%.

In addition to the cost-plus formula, the analyst said he likes the deal, which comes as a bit of a surprise, because it shows the depth of the company's pipeline prospects and reiterates management's positive outlook. 

Mr. Lacroix has a "buy" rating and C$66 price target on SNC shares.