SNC Tests Caisse’s Patience With New Profit Warning, Charge
SNC to Take $1.45 Billion Charge as Reorganization Ramps Up
(Bloomberg) -- SNC-Lavalin Group Inc.’s largest shareholder is losing patience.
The Caisse de Depot et Placement du Quebec said the embattled engineering firm’s deteriorating performance is “a cause of growing concern” after it said it would take a C$1.9 billion ($1.45 billion) charge and issued its third profit warning this year. In a rare rebuke, the pension fund said the situation requires decisive action by the board.
Shares of Montreal-based SNC fell the most since May on Monday after it announced a reorganization and predicted “significantly lower results” this year. The company is moving away from lump-sum turnkey contracting, whereby the company bears the risks of unpredictable cost overuns and retrenching to focus on services in engineering, nuclear and infrastructure management.
SNC says more than 80% of its turnkey backlog, where SNC takes charge of everything from design to construction, will be done by the end of 2021.
Shares fell as much as 8% to C$23.48 in Toronto, the biggest intraday decline since May 3. That put the Caisse’s 20% stake at about C$829 million. The company’s C$200 million in bonds due in 2023 yielded 180 basis points over government bonds. That compares with about 169 basis points on Friday, according to Bloomberg Valuation prices.
“For the benefit of all the company’s stakeholders, the new strategic direction must be comprehensive and capable of reversing the current unacceptable trend of the business,” said the Caisse, which manages the pension fund savings of the province of Quebec and has about C$309.5 billion under management. “We also expect this strategy to be accompanied by a realistic plan for its execution.”
The tone offers a stark contrast with a show of support in February, when Caisse Chief Executive Officer Michael Sabia said the pension fund would be a “rock of support” for SNC.
The company changed CEO last month, tasking Ian Edwards with establishing a plan “for sustainable success” after a string of woes that sent the shares down 58% over the past year.
Previous Warnings
Before Monday, the company had already issued two profit warnings since January, written down the value of its Middle East energy business, and was dealt another blow when Chilean copper producer Codelco canceled a contract valued at $260 million in a case that was sent to arbitration. The company also found itself at the center of Canada’s biggest political crisis.
SNC will split its resources and infrastructure construction segments into separate business lines. It withdrew is forecast for the year amid the reorganization, predicting a second-quarter loss before interest, taxes depreciation and amortization of C$150 million to C$175 million for engineering and construction. SNC expects to reports result Aug. 1.
“Lump-sum, turnkey projects have been the root cause of the company’s performance issues,” Edwards said in the statement. “By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source, and as a result we expect to see a material improvement in the predictability and clarity of our results.”
Trial Approaching
SNC’s C$1.9 billion non-cash charge is related to its oil and gas business, which is part of the struggling resources unit that the company is now considering selling.
Some investors saw reason for hope.
“He is not wasting any time, swift action needed to be taken,” Chris Kerlow, a portfolio manager at Richardson GMP who owns SNC shares said on BNN Bloomberg TV. The decision seems like the right one, he said.
The Caisse also said it continues to believe that with the necessary changes in strategy and in execution, SNC-Lavalin has the capabilities to be a successful global business.
The reorganization will allow the company to focus on end-to-end project management capabilities at SNCL Engineering Services, delivering consistent earnings and cash flow, with a leaner capital structure, according to SNC’s Edwards.
“The run-down of fixed-price contracts will take time, but there is no longer uncertainty to SNC shareholders what this company will look like in five years,” Maxim Sytchev, an analyst at National Bank of Canada, wrote in a note to investors. The company in its new form will resemble more of a consulting-type entity in its future form, he said.
While the company reorganizes the business, it’s also bracing for trial later this year. SNC has been charged with paying bribes related to work in Libya about a decade ago and if convicted could face a 10-year government ban in Canada. It has said it will vigorously defend itself at trial.
SNC’s legal troubles reached touched the office of Prime Minister Justin Trudeau when a cabinet minister said she resigned after being pressured by the government to come to a deal to settle the case.
--With assistance from Paula Sambo and Aoyon Ashraf.
To contact the reporter on this story: Sandrine Rastello in Montreal at srastello@bloomberg.net
To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, ;Jacqueline Thorpe at jthorpe23@bloomberg.net, Tony Robinson
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