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Transparency is key for SNC-Lavalin's future

Shares of Montreal-based engineering company SNC-Lavalin are down 19 per cent since February, when it announced an internal investigation into $35-million in unexplained payments, apparently related to its operations in Libya.

Christinne Muschi / Reuters/Christinne Muschi / Reuters

Investors hope this week will shed some light on SNC-Lavalin Group Inc. 's accounting problems.

Shares of the Montreal-based engineering company are down 19 per cent since February, when it announced an internal investigation into $35-million in unexplained payments, apparently related to its operations in Libya. The decline adds to earlier losses after the company's ties to the family of the late Libyan dictator Moammar Gadhafi came to light.

Last month, SNC delayed reporting fourth-quarter financial results to accommodate the internal review, saying it will take a $23-million charge related to Libya.

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It also said that 2011 profit will fall short of expectations by about $80-million, or 18 per cent, in part because of exposure to the African country.

Analysts reacted by notching down expectations. They now expect SNC to deliver audited statements by this Friday, along with a full explanation of what went wrong. (At the end of February, SNC said it planned to post results before March 30. Last Friday, however, the company would still not confirm a reporting date.)

Where the share price goes next depends on how transparent management and the board are about what has happened, says Frederic Bastien of Raymond James Ltd. The company's leadership must "take ownership of any misdeeds found and present us with a clear plan to rebuild investor confidence and shareholder value," he says.

"The ideal scenario, obviously, is one where the results of the investigation single out Libya as the only black sheep and management not only presents a valid explanation for the mess it found itself in, but also offers a credible course of action to embark on," Mr. Bastien wrote in a note published Friday.

If management provides a clear explanation that shows its problems were contained to Libya, the stock could jump between 10 per cent and 20 per cent, he said.

But if SNC doesn't meet the Street's unofficial schedule for reporting this week, speculation will rise that the company is having trouble reaching a consensus with its auditors and the stock would likely continue its decline.

In terms of the raw financials, the Street is expecting Canada's largest engineering company to post slim revenue growth of 1.4 per cent, to $1.9-billion for the three months ended Dec. 31. Profit is forecast to have fallen by half, to $69.4-million.

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If investors are skittish about SNC right now, early signs suggest that industry is not. The company has added several important projects during the chaotic last few months. The Ontario government last week confirmed that SNC has been selected, along with Cintra Infraestructuras S.A., as the preferred bidder to finance, build and maintain the first phase of the extension of Highway 407. The project is expected to cost more than $1-billion.

At the same time, SNC announced that it had signed a $133-million project management contract with Petroleos de Venezuela S.A for an offshore natural gas development in Venezuela.

The win in Ontario "improves visibility and shows it is business as usual at SNC despite Libyan headlines," noted Yuri Lynk, of Canaccord Genuity Corp.

National Bank Financial Inc.'s Trevor Johnson, one of the more bearish analysts following SNC, says there are too many unknowns right now to buy the stock on weakness. Similar to most people watching the company, he hopes management will put concerns to rest this week.

"Our fundamental view is that these incidents will be contained and SNC will be able to get back on track in 2012," Mr. Johnson said in a research note.

"The company is too large, connected, well-penetrated and diversified, and its work too valuable for its share price to erode much more meaningfully than we have seen already."

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