SNC slides on Mideast woes
Profit forecast cut after oil and gas setbacks
MONTREAL• S NC-Lavalin Group Inc. shares took their biggest hit in more than a year Thursday after the company lowered a profit forecast on news of troubles with two oil and gas projects in the Middle East.
And one analyst sees the news as a chance for investors to take advantage of a situation he says shows the long- term strength of the company.
The stock closed at $51.10, down $3.84 or 6.99 per cent in Toronto trading — it was off as much as 7.3 per cent during the day, the biggest intraday percentage loss in more than a year — after announcing that a review process established it was expecting “unfavourable” cost and revenue reforecasts in the third quarter due to commercial issues with these two Middle East contracts.
Adjusted earnings from engineering and construction this year will be $1.30 to $1.60 a share, compared with a previous outlook of $1.50 to $ 1.70, Montreal- based SNC said in a statement.
“The effects of those at this stage were deemed to be material enough to assess the guidance we had issued earlier in the year,” said SNC- Lavalin chief financial officer Sylvain Girard in an interview.
“At times you have to take accounting positions or financial positions that until you resolve [ those issues], you have to take a conservative view of what will happen,” he said.
Girard said SNC is in discussions to resolve the issues with these two contracts.
“In any project you’re going to run into matters that you have to address, so there’s nothing unusual about that,” he said.
Girard would not disclose the names or locations of the projects and the exact causes for the revised forecast, but did say the company came across issues in its pricing rates and execution requirements.
“It really is a combination of things,” he said. “When you have large projects or complicated projects you might find yourself in situations where it’s costing you more than you thought or it’s more complicated than you thought and then you have to revisit some of the conditions you had in executing them.”
In the Middle East, SNCLavalin has oil and gas projects in Saudi Arabia, Qatar and Kuwait, along with working with international oil companies in Iraq. The company said this drop will be reflected in the third quarter — which ends Friday — but is expected to return to a more normal run rate by the fourth quarter.
Raymond James analyst Frederic Bastien said the warning i ndicates SNC’s overruns are well understood and conservatively accounted for, in addition showing a strong collaboration on the projects, witch he says are both for the same client.
“We are treating today’s setback — the first under [ CEO] Neil Bruce’s tenure — as an attractive buy-onweakness opportunity,” Bastien said in a note to clients. “Thanks to the various inter- nal controls implemented recently, management can now identify, quantify and address project challenges more rapidly than in the past.”
SNC continues to target an adjusted earnings before interest, taxes, depreciation and amortization margin of seven per cent in 2017. But National Bank Financial analyst Maxim Sytchev said there will now be more questions regarding whether the company will be able to make it, and forecasts a 6.5-per-cent EBITDA in 2017 due to a 10- per- cent decline in oil and gas revenue.
He said that while the company is doing a lot to improve from an operational perspective, when the narrative around a story focuses on execution, the guidance step-down is more impactful in the short term.
“Investors will need to see another string of positive quarters before once again ‘ believing’ that the improved execution is not transient in nature,” Sytchev wrote in a note to clients.
Before Thursday, SNC shares had climbed more than 45 per cent in the past 12 months.
Girard said that more details about the issues and their impacts will be disclosed when the company releases its third-quarter results on Nov. 3.