Morningstar | SNC-Lavalin Reports CAD 1.2 Billion Charge in Oil and Gas, Cuts Dividend; Lowering FVE. See Updated Analyst Note from 24 Feb 2019
We modestly reduce our fair value estimate for SNC-Lavalin to CAD 36 from CAD 37 after the no-moat engineering and construction firm released disappointing fourth-quarter results. The fourth quarter was challenging for SNC-Lavalin, and management issued two warnings within the last two months that adjusted 2018 EPS would fall well below consensus estimates and the management guidance range of CAD 3.60-3.85 provided in November 2018. As our previous model already reflected lowered expectations, the official earnings release did not have a major impact on our fair value estimate as adjusted full-year EPS of CAD 1.31 fell within the guidance range provided earlier this month.SNC-Lavalin posted a CAD 7.50 per share full-year 2018 IFRS net loss, driven primarily by a CAD 1.2 billion charge in its oil and gas segment as deteriorating relations between Canada and Saudi Arabia, where SNC currently employs over 15% of its workforce, continue to be a headwind. These challenges, coupled with commodity price volatility and uncertainty around key customers’ investment plans, lead to a goodwill impairment charge in the segment.
Another reason for disappointing 2018 results was an issue the company uncovered with a project in the mining and metallurgy segment, driven by cost over-runs and lower-than-expected recognized revenue for the period, which had a material adverse impact on 2018 earnings. According to management, SNC-Lavalin agreed to an accelerated arbitration process with the client, and the firm expects some future recoveries.
Challenges continue to mount for the Canadian engineering and construction firm, and management decided to cut the quarterly dividend from CAD 0.287 to CAD 0.10 per share in order to reduce debt. While we view the 3-star-rated shares as reasonably valued, given the uncertainty around the outcome of a court decision regarding bribery and corruption charges related to projects in Libya, we caution that headline risk remains high.
SNC-Lavalin Group is an engineering and construction group, and is engaged in the ownership of infrastructure and in the provision of operations and maintenance services. Co.'s segments are: mining and metallurgy, which provide tailored solutions for projects in the aluminum, gold, copper product sectors, among others; oil and gas, which includes projects for oil and gas and resources companies; power, which includes projects and services in hydro, and nuclear and thermal power generation, among others; infrastructure, which include infrastructure & construction, and operations and maintenance; capital, which invest in equity or subordinated debt into projects for public services.
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