Fixed-bid projects may still give SNC a shock
SNC-Lavalin Group Inc. is exiting the business of “lumpsum turnkey” construction contracts, but analysts say the embattled engineering firm’s existing backlog could still present some problems.
Montreal-based SNC announced in July that it would move away from the fixedprice projects, which its interim CEO said were “the root cause of the company’s performance issues,” and instead “focus on the high-performing and growth areas of the business,” such as design and engineering services.
Since then, the company’s stock price has continued its descent, with shares down more than 60 per cent for the year. On Tuesday, following more tough talk from the firm’s biggest shareholder, SNC’s stock price fell more than eight per cent to close at $16.36.
While some analysts are taking a wait-and-see approach when it comes to the company’s new direction, further issues with the lump-sum portfolio remain a possibility.
All things considered, we feel there are still good reasons to watch the stock from the sidelines.
Raymond James analyst Frederic Bastien wrote in a recent note that there were still “a handful” of early-stage projects for SNC “that could turn problematic, if left unchecked.”
“All things considered,” Bastien said, “we feel there are still good reasons to watch the stock from the sidelines.”
SNC has also come under pressure from its biggest shareholder, the Caisse de dépôt et placement du Québec, which owns approximately 20 per cent of its shares.
While the Caisse had noted in July that SNC’s performance was “a cause of growing concern,” on Monday the fund’s chief executive had even stronger words, calling on SNC to urgently improve the quality of its execution, according to reports. Both the company and some analysts who cover it say changes could take time to bear fruit, which may not be what investors who watched the value of their SNC shares plummet want to hear.
SNC has said it will fulfil its contractual obligations and phase out its $3.4-billion backlog by the end of 2024.
RBC Capital Markets analyst Derek Spronck said in a report that “management must continue to articulate their vision and execute on it.”
“As SNC winds-down its $3.4B fixed-bid project backlog, there remains the potential for material cost overruns,” Spronck wrote. “No question that risk is real. However, we believe it has been more than accounted for at current valuations.”
Fitch Ratings said in a commentary Tuesday that recent Canadian infrastructure conferences have seen contractors complaining “that in the effort to achieve ‘value for money’ and maximize profits, government counterparties and equity sponsors are pushing too many risks down to the contractors, resulting in fixed-price projects becoming unprofitable.”