SNC-Lavalin slashes dividend by 80% after $2.1-billion loss
MONTREAL — SNC-Lavalin Group Inc. delivered more harsh news to investors Thursday, cutting its quarterly dividend by 80 per cent as the troubled engineering giant grappled with a $2.12-billion net loss in its second quarter and a stock price that hit a new 14-year low.
The dividend drop to two cents per share from 10 cents per share came after a third straight quarter of losses and amid a major strategic shift under the company’s new CEO, whose predecessor left in June following the controversial handling of a high-profile court case that has embroiled the federal government.
SNC-Lavalin’s share price fell more than nine per cent Thursday to close at $18.92, its lowest level since January 2005. Over the past year, its market value has dropped by about two-thirds to $3.32 billion. “This was a really tough and disappointing quarter,” interim chief executive Ian Edwards said on a conference call.
“In recent quarters we have provided guidance on our financial results that we did not deliver. This is unacceptable,” he said.
After slashing its profit forecast three times since January — the latest came abruptly last week, far below analysts’ expectations — Edwards on Thursday announced a new oversight manager who reports directly to him, a move intended to facilitate tying off SNC’s nearly two-dozen big fixed-price construction contracts over the next few years.
Last month, Edwards announced the company is quitting the field of so-called lumpsum turnkey projects — “the root cause of the company’s underperformance,” he said Thursday — and pivoting to a more stable business model that revolves around engineering services, steering clear of the cost overruns absorbed by fixed-price bidders.
Edwards reiterated his aim of “exploring all options” for SNC’s resources segment, including selling its oil and gas business — which accounted for one quarter of overall company revenues last year, down from 44 per cent in 2016.
SNC-Lavalin remains saddled with a $4.6-billion backlog on fixed-price resource and infrastructure contracts, its “biggest stumbling block,” said analyst Maxim Sytchev of National Bank of Canada.
The two areas — which include oil and gas projects and mine construction in the Middle East as well as two rail projects in Canada — cost the firm about $307.7 million before interest and taxes in the latest quarter due to higher expenses, the company said.
“Some are assuming the company will need as much as $500 million to $1 billion to complete these projects given the lack of a clean track record on the part of SNC’s management,” Sytchev said.
While revenue at SNC’s main segment — newly formed to handle a swath of engineering services — grew nearly 11 per cent, the unit’s earnings before interest and tax dropped nearly 20 per cent amid falling margins across all sub-divisions.
“Performance in most divisions is underwhelming,” Sytchev said.
Nonetheless, SNC-Lavalin’s renewed focus on engineering and design is already bearing fruit. It won engineering, consultant and planning contracts in the United Arab Emirates and southern U.S. last month, which “show SNC continues to be successful in winning work outside of Canada,” analyst Frederic Bastien of Raymond James said in a research note.
Thursday’s dividend cut dents earnings at Quebec’s Caisse de dépot, SNC’s largest investor whose nearly 20 per cent stake has dropped in value by nearly $875 million since the beginning of the year. The pension fund manager’s nearly 35 million shares will now bring in about $2.8 million less in dividends each quarter, an $11.2-million hit annually.
Last week the Caisse took the rare step of publicly rebuking the firm, saying its recent performance “requires decisive and timely action” by the board.
Analysts expect the sale of SNC-Lavalin’s $3.25-billion stake in Ontario’s 407 toll highway to be completed in the third quarter. Management confirmed Thursday it plans to put the proceeds toward debt repayment, including a $600-million payment on a loan from the Caisse.