Engineering giant SNC-Lavalin slashes profit 2013 outlook to $10M-$50M range

MONTREAL – Engineering giant SNC-Lavalin says its long-term prospects remain positive despite sharply lowering its earnings forecast for fiscal 2013.

Montreal-based SNC said it now expects consolidated net income to be in the range of $10 million to $50 million (five to 35 cents per share). That’s well below its previous guidance of $220 million to $235 million ($1.45 to $1.55 per share).

SNC cited a number of money-losing legacy contracts and a $75-million charge related to a restructuring of its European operations.

Analysts, on average, had been expecting full-year net income of $226.83 million, according to Thomson Reuters.

“Certain legacy fixed-price contracts entered into by the company between 2010 and 2012 and the ongoing softness in the mining sector unfortunately continue to stress our performance in 2013,” president and CEO Robert Card said Tuesday.

“Going forward, we will remain focused on winning and delivering high-margin projects and implementing measures to restore our SG&A (selling, general and administrative expenses) to historical levels, or better, with the aim of better positioning SNC-Lavalin for growth.”

SNC-Lavalin (TSX:SNC) said it had recorded unfavourable cost “reforecasts” in the third quarter on certain unprofitable fixed price contracts in North Africa and in the hospital and road sectors.

However, the company said it believes the changes, which relate mostly to projects already in a loss position, are “one-time events not expected to further affect future profitability.”

Industry observers said the negative adjustment was not unexpected and should have no impact on the beleaguered firm’s long-term prospects.

“Consensus will scream today: ‘We told you so’. True but the contribution from the difficult projects will roll off in 2014,” wrote Maxim Sytchev of Dundee Capital Markets.

Although it wasn’t identified by name, the analyst said the McGill University Health Centre was the likely money-losing hospital project and that the mining sector was already expected to slip 20 per cent from last year.

Sytchev said SNC’s management team is much stronger than it was 20 months ago when some ethical issues forced out the former CEO and several top executives.

“With Bob Card being at the helm of the company for the last 12 months, this is probably the big bath accounting event that the management was hoping to take on Day 1. Now, with CEO and CFO in permanent spots, this is the guidance they own,” he added.

Sara O’Brien of RBC Capital Markets said some of the lower earnings could be reversed next year as SNC-Lavalin seeks redress from clients on unprofitable contracts and second-quarter provisions in North Africa aren’t required.

Still she expects that the recurrence of write-offs could be troubling to credit rating agencies and lenders even though they could be one-time actions.

She lowered her target price for SNC shares slightly to $45 saying investors need a few quarters of earnings visibility before confidence improves.

Pierre Lacroix of Desjardins Capital Markets said the nearly $400 million in provisions and restructuring charges booked for 2013 doesn’t reflect bidding activity by the company. Still, he expected the company’s shares would be hit in Wednesday trading as investors take “a more cautious stance.”

SNC’s stock dropped nearly five per cent, down $2 to close at $42.13 in Wednesday trading.

SNC-Lavalin, which will announce its third-quarter results Nov. 1, has been reducing its investments in infrastructure assets and recently announced the possible disposal of a minority interest in AltaLink, which owns more than half of Alberta’s electricity grid.