SNC-Lavalin shares hit 14-year low, company withdraws outlook

SNC-Lavalin Group Inc. (SNC.TO) has announced it is “exploring all options” for its resources segment amid a major reorganization that will see the company split away and exit underperforming businesses.

The embattled Montreal-based engineering giant announced it will abandon lump-sum turnkey contracting and split into two operating units, separating the “high performing” businesses from other operations. “Lump-sum, turnkey projects” refer to work that a contractor would do for a fixed cost to a customer.

The company announced the major restructuring on Monday, calling the move a step in a “new strategic direction.”

SNC-Lavalin also warned its results for 2019 will be significantly lower than previously forecast, withdrawing prior financial guidance for the year ahead of the release of second-quarter earnings on Aug. 1.

Toronto-listed shares fell 6.94 per cent to $23.74 at 12:47 p.m. ET. The stock fell to its lowest for the shares in 14 years in Monday’s trading session.

“Lump-sum, turnkey projects have been the root cause of the company’s performance issues. By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source, and as a result we expect to see a material improvement in the predictability and clarity of our results,” chief executive officer and interim president Ian Edwards wrote in a news release on Monday.

“The reorganization will allow us to focus on leveraging growth opportunities and end-to-end project management capabilities that we have in SNCL Engineering Services, delivering consistent earnings and cash flow, with a leaner capital structure, to our shareholders.”

Speaking in a video message posted to YouTube, Edwards said the “varied” performance of the company’s turnkey contracting business has historically overshadowed other strengths within the company.

Edwards added that SNC-Lavalin will fulfill all obligations to clients on current “lump-sum turnkey” contracting, oil and gas, and mining projects, but will not bid for further projects.

SNC-Lavalin said it will take a $1.9 billion impairment charge related to its oil and gas business. The company now expects second-quarter adjusted earnings before interest, tax, depreciation and amortization from its engineering and construction unit to be in the range of negative $150 million to negative $175 million.

Edwards replaced Neil Bruce as chief executive in June. SNC-Lavalin’s board tasked him with de-risking and simplifying the company’s business model when he took the top job.

Derek Spronck, vice-president of equity research at RBC Capital Markets, approves of the changes announced on Monday, saying SNC-Lavalin is wisely shifting resources to higher quality segments.

“SNC and interim CEO Ian Edwards are taking the correct and prudent steps,” he wrote in a research note on Monday.

“We do continue to see fundamental value of shares of SNC relative to current valuations, and recommend the shares for investors that are more risk adverse and have a longer investment time horizon.”

Raymond James analyst Frederic Bastien said SNC-Lavalin remains on the hook for $3.2 billion worth of lump-sum, turnkey projects projects—including Montreal's Réseau Express Métropolitain transit system. He expects it will take the company until the end of 2021 to work off its project backlog, and notes it will retain contractual obligation for two additional projects through 2024.

“Poor projects rarely ever get better. That uncertainty, in our view, will continue to weigh on SNC for some time to come,” Bastien wrote in a note to clients.

One of the world’s largest engineering firms with more than 50,000 employees around the world, SNC-Lavalin has been the subject of controversy for several years.

SNC-Lavalin was recently at the centre of a political firestorm that saw Federal Justice Minister Jody Wilson-Raybould resign. Wilson-Raybould cited pressure from the Prime Minister’s Office to opt for a deferred prosecution agreement in a corruption and fraud investigation of the company.

SNC-Lavalin is alleged to have bribed government officials in Libya to land lucrative contracts. The RCMP laid charges in 2015. The company said the charges are without merit and stem from “alleged reprehensible deeds by former employees who left the company long ago.”

Bastien said ongoing legal and political risks are among the reasons investors should approach SNC-Lavalin with caution.

“Incoming CEO Ian Edwards faces the daunting task of righting the SNC ship at a time when legal uncertainty prevails, political posturing is still hurting the business, project execution risks remain high and employee morale is anything but,” he wrote.

“Until the company can alleviate some, if not all of our concerns, we remain on the sidelines.”

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