Shares in SNC-Lavalin Group Inc. fell further on Thursday after the troubled Canadian engineering company cut its dividend again, unveiled a steep second-quarter loss and conceded it “did not deliver” on past promises to investors.
Pension fund giant Caisse de dépôt et placement du Québec, SNC-Lavalin’s biggest investor, said it was closely tracking the situation.
In his first conference call exchange with analysts and investors on Thursday as SNC-Lavalin’s interim chief executive officer, Ian Edwards failed to stem concern about SNC-Lavalin’s prospects. The company’s stock, which was already trading at lows not seen in 14 years, dropped further after the call, closing down another 9.4 per cent to $18.92 in Toronto trading.
“I think people are just fed up,” said David Taylor of Taylor Asset Management in Toronto, which owns SNC-Lavalin shares, adding that investor confidence in management and the board has been badly shaken. “My only hope is that the largest shareholders … take action.”
SNC-Lavalin shares have dropped in seven of the past nine trading sessions since July 22, when the company took the market by surprise and said 2019 financial results would come in “significantly lower” than anticipated. Management blamed higher costs on infrastructure and resource projects.
It was SNC-Lavalin’s third profit warning since January, and prompted a rare public comment from the Caisse, which called out “the current unacceptable trend of the business” and urged “decisive and timely” action from the SNC-Lavalin board. The Caisse holds a stake of about 20 per cent in SNC-Lavalin.
On Thursday, Caisse spokesman Maxime Chagnon said: “We note the company’s intention to address the current performance trend. We will continue to monitor the situation and follow the company’s decisions closely.”
Pressure is mounting on SNC-Lavalin after the company reported a $2.1-billion loss for the second quarter. Mr. Edwards has set a new course in which the company will take on less risky work amid unprecedented legal challenges.
In the new CEO’s strategic shift, SNC-Lavalin will stop bidding on construction contracts that it executes for a lump sum and instead do more consulting services work and focus on its nuclear operations. The idea is to retreat to parts of the business where profits are higher while gradually getting out of fixed-price contract work, which it says is riskier because the builder agrees to absorb cost overruns.
SNC-Lavalin is pulling out of bidding on several major Canadian infrastructure projects for which it has been shortlisted, altering competition for billions of dollars worth of contracts in Canada. The projects include Vancouver’s $2.8-billion SkyTrain Broadway extension, Edmonton’s new Valley Line West light-rail line and Montreal’s Lafontaine tunnel modernization.
One of the main investor worries is that problems with some fixed-price contracts will generate further losses in the months ahead. The company on Thursday disclosed 11 big lump-sum contracts it intends to complete by 2024, and mandated a new manager to oversee that effort.
“Investors can no longer stomach the volatility around the [lump-sum] contracts,” even if they are being closed out, National Bank of Canada analyst Maxim Sytchev said in a research note. The biggest question is whether there could be incremental write-downs on SNC-Lavalin’s portfolio of legacy contracts, he said.
Other developments also weighed on SNC-Lavalin shares on Thursday, including the company’s decision to cut its quarterly dividend for the second time this year to $0.02 a share from $0.10, and profit contraction in its engineering services. SNC-Lavalin has called engineering services, which includes consulting work, its “high-performing and growth” area and the one it will focus on in the years ahead. The company said it would generate positive operating cash flow in the second half of the year, but provided limited information about how that will be achieved.
SNC-Lavalin reported a net loss of $2.1-billion or $12.07 a share for the second quarter on revenue of about $2.3-billion. That compares with a profit of $83-million or $0.47 a share for the same quarter last year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from its main engineering and construction business were negative $151.8-million, in line with the profit warning last week. The company had a backlog of work awarded but not yet completed of $15.7-billion at the end of June, up 3 per cent from the same time last year.
The loss for the quarter was due to a non-cash charge worth $1.8-billion linked to SNC-Lavalin’s resources business, which was also previously disclosed. The company is weighing its options for the resources unit, including a sale.
“This was a really tough and disappointing quarter,” Mr. Edwards said on the call Thursday morning, acknowledging the company has not met the recent financial forecasts it provided to investors. “We did not deliver. This is unacceptable and it’s unacceptable to me, and it is unacceptable for our stakeholders, who place their trust in the company to do what we say we will do. This is why in the past seven weeks, I have taken decisive action and we’ll continue to do so for the long-term success of the company.”
Premier François Legault’s Coalition Avenir Québec government has vowed to try to protect SNC-Lavalin as a strategic asset to the province in the event of a hostile takeover bid, a possibility that increases as the company’s stock price drops. The government has signalled it would work in concert with the Caisse in that effort.
SNC-Lavalin is still waiting on a decision by an Ontario judge before it can receive expected after-tax proceeds of $2.6-billion from the sale of its 10-per-cent stake in Ontario’s Highway 407 toll road. The judge is ruling on the rights of existing shareholders to buy the stake.
The reset by Mr. Edwards, who took over in early June after the sudden departure of Neil Bruce as CEO, comes just weeks after the company confirmed to investors it would post adjusted EBITDA in its main engineering and construction business of $900-million to $950-million for 2019. That forecast has since been dropped.
SNC-Lavalin’s problems have multiplied since October, when it announced federal prosecutors would not negotiate a deal to settle bribery and fraud charges against the company. Its effort to get a settlement called a deferred prosecution agreement became a political crisis for the Trudeau government.
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