Morningstar | SNC-Lavalin Takes a Beating After Management Warns That 2018 Results Will Fall Short of Expectations
SNC-Lavalin’s stock plunged by more than 25% on Jan. 28 after management announced that full-year 2018 results will come in well below expectations. Based on disappointing 2018 guidance and management’s more cautious tone for 2019, we cut our fair value estimate for this no-moat engineering and construction firm to CAD 40 from CAD 51.CEO Neil Bruce announced that the company uncovered a problem with a project in the mining and metallurgy segment and expects its underperformance to have a material adverse impact on 2018 earnings, driven by both cost overruns and lower-than-expected recognized revenue for the period.
Furthermore, deteriorating relations between Canada and Saudi Arabia, where SNC currently employs over 15% of its workforce, continue to be a headwind in the oil and gas segment. Bruce said that these challenges, coupled with commodity price volatility and uncertainty around key customers’ investment plans, will result in a CAD 1.2 billion (or roughly CAD 7 per share) aftertax goodwill impairment charge in the oil and gas segment.
Management now expects adjusted diluted 2018 EPS of CAD 2.15-2.30 (compared with CAD 3.60-3.85 guidance provided in November 2018). Bruce also said that the aforementioned uncertainties will probably lead to a more cautious outlook for 2019. We expect to provide an update on Feb. 22 when the company releases more details on its 2018 results and outlook for 2019.
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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