SNC-Lavalin to step back from 15 countries, swear off fixed price bids in mining [UPDATED]
The plan is to focus on core geographies and remove unprofitable revenues across 15 countries, including combining its oil and gas business with its mining unit
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MONTREAL – The head of SNC-Lavalin Group Inc. said the company will wind down its operations in 15 countries and swear off bidding on fixed-price contracts in the mining industry as it reported a loss in its latest quarter.
“We remain confident that we can deliver our 2019 outlook, despite being disappointed with our first-quarter performance,” Neil Bruce said in a statement Thursday.
“We will be focusing on our core geographies and are removing unprofitable revenues across 15 countries where we have sub-scale operations.”
“We also stopped bidding on lump sum EPC (earnings, procurement and construction) projects, as going forward we will be undertaking lump sum EPC work in infrastructure and oil and gas only in our core regions where we have strong capabilities,” Bruce added.
SNC-Lavalin is firmly rooted in both construction and engineering, exposing it to potentially higher margins, but also the cost overruns and fixed-price contracts that can plague the world of builders.
Bruce noted the company is undergoing an organizational revamp, combining its oil and gas business with its mining unit as part of a cost-reduction program under chief operating officer Ian Edwards, who was appointed in late January.
However, analysts met Bruce’s ongoing faith in SNC’s 2019 profit forecast with skepticism.
Frederic Bastien, an analyst with Raymond James, said the promised turnaround “seems unrealistic to us at first blush.”
“Considering the many cost savings initiatives of past years, we find it somewhat surprising these is still that much fat to trim out of the business,” he added, regarding the cost-reduction program.
Analyst Derek Spronck of RBC Dominion Securities noted some would question “whether SNC-Lavalin will be able to meet their 2019 guidance targets.”
The forecast calls for earnings before interest, taxes, depreciation and amortization of between $900 million and $950 million.
Earlier this year, the firm slashed its 2018 guidance twice in three weeks, more than halving its profit forecast and halting all bidding on future mining projects amid a diplomatic feud between Canada and Saudi Arabia – a key source of oil and gas revenue – and delays on SNC’s project with Codelco, Chile’s state-owned copper mining company, which has since cancelled the contract.
The two problems were the “primary cause” of the company’s lower earnings, Spronck suggested.
The engineering and construction giant said it lost $17.3 million or 10 cents per share for the quarter ended March 31. That compares with a profit of $78.1 million or 44 cents per share in the first quarter of last year.
Revenue totalled $2.36 billion, down from $2.43 billion a year ago.
On an adjusted basis, the Montreal-based company said it earned 21 cents per share for the quarter compared with an adjusted profit of 77 cents per share a year earlier.
The results included an adjusted loss of eight cents in its engineering and construction business, while its capital investments business earned 29 cents per share in its most recent quarter.
That compared with an adjusted profit of 51 cents from the engineering and construction side a year ago, while the capital investments business earned 36 cents per share.
SNC also announced that a shareholder of Highway 407 may exercise its right of first refusal on the company’s plan to sell the bulk of its stake in the toll highway operator for $3.25 billion, a move announced April 5 and expected to close in about a month.
If that happens, SNC will owe OMERS – the pension plan poised to buy a 10.01% stake in 407 International Inc. – a break fee of 2.5% of the purchase price, or about $75 million, said analyst Benoit Poirier of Desjardins Capital Markets.
“Considering this shareholder only has to match OMERS’ $3.25-billion offer, the net proceeds to SNC are unlikely to change materially,” Bastien added.