SNC-Lavalin Group Inc. is finding itself in an unusual position: beating profit estimates, forecasting a rosier future, and being prodded on its plans for the $3-billion the company expects to pocket on the sale of its Alberta electricity transmission company AltaLink.
It is a welcome change for an engineering firm that made headlines for its alleged implication in bribery scandals that spanned the globe, including in its hometown of Montreal. But the turn in fortune also comes with its own challenge: Selling SNC’s new growth strategy to wary investors.
SNC’s president and chief executive, Robert Card, hopes to double the company’s revenues within five years as the industry consolidates “rapidly” the same way law firms have merged in recent months and years. “Either you figure how to grow, either you should have a sell strategy,” he said in a press conference following the annual shareholder meeting.
But some analysts question whether the acquisitions SNC is now contemplating, likely in the oil and gas engineering sector, will truly benefit shareholders. They would rather have the company pay out a large dividend. Generating future value from reinvesting the proceeds from the AltaLink sale is “far from assured,” wrote CIBC World Markets analyst Paul Lechem as he downgraded SNC’s stock to “sector performer.”
SNC will have even more cash on its hands when it sells its 17-per-cent stake in the lucrative Highway 407 concession, a “mid-term decision,” according to Mr. Card. For now, though, SNC is holding on to its piece of the toll road whose construction isn’t completed.
While SNC’s senior management maintains that all options, including a special dividend, are still on the table, its statements pave the way for a sizable deal such as the acquisition of the Kentz Corp., a rumoured target, that would transform SNC. “The purpose is to build, in the long term, a successful and sustainable engineering company. … While there may be some attractive or semi-attractive short term solutions, unless you go for the right solution, you are not doing the shareholder a favour,” said chairman Ian Bourne.
Mr. Card hopes to increase the proportion of revenues SNC derives from its services, which are more stable than its construction revenues. Currently, the company’s revenues are split almost equally between the two. SNC’s president also hopes to boost the company’s presence in the United States and in the Middle East.
If SNC’s first-quarter results have any bearing, organic growth is not propelling the engineering firm forward. The company’s revenues fell to $1.72-billion, a 9-per-cent drop year over year. However, net income shot up to $94.6-million, a 76-per-cent jump attributable in part to the reversal of a risk provision the company had taken on contracts in North Africa. On a per share basis, earnings rose to 62 cents, beating by a wide margin the 46 cents financial analysts were projecting.
A close to 10-per-cent reduction in company expenses also improved the bottom line, as the work force fell to 30,000 employees compared to 34,000 a year ago. Mr. Card indicated, however, that most of that labour contraction resulted from the completion of big contracts. When asked, the president was unable to tell how many jobs have been lost in Montreal, where SNC is headquartered.
The company’s backlog, at $8.4-billion, has stabilized, though it is 18 per cent lower to where it stood a year ago. The weight of the most problematic contracts has fallen in a similar proportion to about $730-million.
Following the sale of AltaLink, which reduces its amortization charges, SNC has boosted its 2014 forecast. Earnings per share should be in the range of $2.80 and $3.05 – excluding any gain on the AltaLink disposal. No rebound is expected in infrastructure and construction, as well as in oil and gas, which is weighed down by legacy problems. The mining and metallurgy segment also continues to be adversely affected by softening commodity markets. However, the power sector, the concessions investments and the operation and maintenance activities should fare better.Report Typo/Error