SNC-Lavalin Group Inc. drew a rare lecture on Monday from its largest shareholder, the pension fund Caisse de depot et placement du Quebec, as its stock dipped near the lowest level in a year on more expected losses and writedowns.
In a statement, the Caisse warned SNC’s board to take “decisive and timely action” after the Montreal engineering and construction firm told shareholders it will lose money for a third consecutive quarter, announced a $1.9 billion write-down and proposed its second restructuring initiative this year.
“The deterioration of SNC-Lavalin’s performance … is a cause of growing concern for la Caisse,” the pension fund said in a statement, adding that “the current unacceptable trend of the business” must be reversed.
It marks the first time that the Caisse, owner of just under 20 per cent of the company’s shares, has spoken critically about the company’s declining performance, even as its shares have slid 60 per cent since last June.
A long term shareholder, the pension had remained quietly supportive while SNC emerged at the centre of a political scandal earlier this year, centred on whether the Prime Minister’s office improperly interfered in a looming criminal bribery prosecution against the company.
Its criticism comes one month after Neil Bruce departed as chief executive, and SNC’s board directed his interim replacement Ian Edwards, former chief operating officer, to review the company’s strategic direction.
Edwards declined a request for an interview but released two pre-recorded videos on Monday, in which he announced his strategic direction.
As many analysts had urged in recent months, SNC plans to segregate its best performing assets including its design and nuclear facility maintenance segments into a separate business unit, called SNCL Engineering Services.
Meanwhile, it will stop bidding on lump-sum turnkey projects that carry higher margins, but also carry higher risk because SNC is responsible for any cost overruns.
“The root cause of all our issues … on a historical basis has been the varied performance within our lump-sum turnkey business,” Edwards said in one of the videos.
The company said its backlog of lump-sum contracts — estimated by some analysts at more than $3 billion — would report under a new unit called SNCL Projects, which it potentially would look to sell.
In its statement, the Caisse appeared to urge the company to take caution as it plots a new strategy, calling for “realistic” execution and for “a comprehensive” plan.
SNC’s stock had dropped 5.3 per cent by mid-afternoon to $24.14, close to its 52-month low of $23.44, driven in part by its announcement that it will report $150 million to $175 million in losses when it announces second quarter results on Aug. 1.
This “is far worse than what our $200 million operating profit forecast implied,” Frederic Bastien, an analyst with Raymond James wrote.
On top of this, the company announced it would take a $1.9-billion writeoff to its oil and gas business as a result of its decision to stop bidding on lump-sum contracts and underperformance.
Far worse than what our $200 million operating profit forecast implied
Frederic Bastien, Raymond James analyst
Maxim Sytchev, an analyst with National Bank Financial, said although the oil and gas business has underperformed, there may be an interested buyer.
“The market right now is depressed for sure,” said Sytchev. “The oil and gas and mining companies are not spending as much capital and that impacts the entire supply chain, but there’s always a buyer depending on the price.”
He added that part of SNC’s problems stem from the fact that it is no longer winning new contracts in Saudi Arabia, where more than 10 per cent of its workforce was based, which it blamed on a diplomatic spat with Canada.
On the bright side, some analysts said the stock has been so beaten down that it’s actually undervalued.
Derek Spronck, of RBC Dominion Securities, wrote that the business units in SNCL Engineering include engineering design and project management, nuclear and infrastructure operations generated $550 million in cash flow for SNC in 2018. That implies a share price of $32, plus another $13 per share for the company’s six per cent stake in the 407 highway, which would mean the company could be worth as much as $45 per share, he wrote.
Still, SNC is set to return to court in Sept. 20 so a trial date can be set on charges that its executives paid out millions of dollars in bribes to win lucrative contracts in Libya more than a decade ago. If convicted, it faces a potential 10-year ban from bidding on any federal contracts in Canada.
“Incoming CEO Ian Edwards faces the daunting task of righting the SNC ship at a time when legal uncertainty prevails, political posturing is still hurts the business, project execution risks remain high and employee morale is anything but,” Bastien wrote in a note on Monday. “Until the company can alleviate some, if not all of our concerns, we remain on the sidelines.”
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