SNC stock skyrockets after ‘improved’ Q3
TORONTO SNC Lavalin Group Inc named Ian Edwards as its new chief executive, and reported upbeat quarterly results on Thursday that allowed the construction and engineering company to begin to move forward from a year that has been plagued by poor-performance and scandal.
It marked the first quarter since the company announced it was splitting into two distinct businesses and exiting lump sum turnkey contracts, which Edwards called “the root cause of the company’s underperformance.”
While the company reported positive net income of $2.8 billion, that number included $2.6 billion of proceeds from the sale of a 10.01-per-cent stake in Ontario’s Highway 407, a toll road that encircles the Greater Toronto Area.
“Our third-quarter results were solid and considerably improved,” Edwards, who took over as interim chief executive in June, said on a conference call.
SNC shares jumped on the results, closing 20.56 per cent at $23.81, but still a long way from the $48 per share it was trading at in January.
The results were the first since the Oct. 21 federal election, in which the Liberal party narrowly retained control. That’s significant because SNC has been embroiled in a scandal since the beginning of the year when it emerged that Prime Minister Justin Trudeau had attempted to force a resolution of criminal charges in Quebec against SNC for allegedly paying millions of dollars in bribes, a decade ago in Libya, to win lucrative contracts there. But Edwards downplayed the impact of Trudeau’s re-election.
“We remain focused on defending ourselves through the court process,” the new CEO said. “I mean obviously if there are opportunities for settling this in another way we’re open to that but we don’t expect it.” He said a trial is expected to commence in 2020.
If the company is convicted of a federal felony, it faces a possible ban on bidding on federal contracts. Edwards
said SNC takes in about $500 million in “federal revenue” but not all of that would be affected.
Meanwhile, the company tried to stress that its exit from “lump sum turnkey projects” will reduce its risk and help right the company.
On such contracts, SNC bids to build a large project at a fixed cost, such as a copper mine processing plant in Chile, and foots any cost overruns or keeps any profits. The business is considered high risk, high reward, although lately it has swung to the former.
Earlier this year, it announced a dispute on one such project with Chile’s state-owned copper producer Codelco resulted in a Us$260-million loss.
“It is very clear that the Codelco project is a significant outlier,” said Nigel White, who joined the company in August as executive vice-president of project oversight.
He said of the company’s $15.6 billion backlog, $11.4 billion is from the services side of the business that is expected to be the future of the company. Only $3.2 billion of the backlog is from lump sum turnkey projects, White said, adding that about $2.7 billion is in Canadian light rail projects where the company historically has generated positive returns.
Derek Spronck, an analyst with RBC Capital Markets, wrote that there are still risks. The company’s overhead needs to be reduced further as it sheds a business, and other lump sum projects could still face cost overruns. Plus, the company’s oil and gas sector continued to underperform.
Edwards said SNC is considering selling its oil and gas business.