SNC shares drop on news of project woes
Commercial issues with Middle East contracts lowering revenue forecasts
SNC-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 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.”
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 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, SNC 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 indicates SNC’s overruns are well understood and conservatively accounted for, in addition showing a strong collaboration on the projects, which 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-on-weakness opportunity,” Bastien said in a note to clients. “Thanks to the various internal 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.