Qaddafi-Era Libya Work Haunts SNC’s Turnaround
Stock Chart for SNC-Lavalin Group Inc (SNC)
A project SNC-Lavalin Group Inc. (SNC) abandoned in Libya two years ago amid the rebellion against dictator Muammar Qaddafi is coming back to haunt Canada’s largest engineering and construction company.
Investors such as Luc Fournier at Industrial Alliance Insurance & Financial Services Inc. (IAG) are questioning whether their shares will rebound after Montreal-based SNC cut its annual profit forecast on Aug. 2. That disclosure included a surprise risk: a possible C$47 million ($45.6 million) loss from a client’s attempt to draw on a credit line for the Libya work.
SNC’s 4.7 percent stock-price slump since then is stirring concern that a turnaround remains elusive for a company tarred by a fraud investigation and investor lawsuits. Chief Executive Officer Robert Card, who took over in October, said on an Aug. 2 conference call that 2013 looms as “a very challenging year.”
“It’s a setback, for sure,” said Fournier, who holds SNC stock among C$1 billion of Canadian equities he oversees at the Quebec City-based firm. “People thought the new CEO was cleaning things up, their big issues were behind them -- and all of a sudden that wasn’t the case. I don’t know how to value this company anymore.”
SNC rose 1.7 percent to C$41 at the close in Toronto. A 23 percent surge for the shares in the first six weeks of 2013 has almost evaporated, and its 1.7 percent year-to-date gain is the fifth-smallest among 21 stocks in the S&P/TSX Industrials Index.
Card, the first American-born head in SNC’s 102-year history, has appointed senior managers and is considering the sale of infrastructure assets including power plants and an airport after grouping them in a new unit.
Former CEO Pierre Duhaime, who quit in March 2012, was arrested eight months later by the Quebec anti-corruption unit and formally charged with fraud, conspiracy to commit fraud and forgery in February. His lawyer pleaded not guilty on his behalf.
SNC cut its forecast this month after posting a surprise second-quarter loss. The company booked the C$47 million “risk provision” after a client unexpectedly attempted to draw on a line of credit in connection with an undisclosed Libyan project that was halted in 2011. SNC also posted a loss of C$70.1 million in the oil and gas unit related to a fixed-price project in Algeria.
Michael Yerashotis, an analyst at Veritas Investment Research in Toronto, said SNC’s North African travails show it’s too early to recommend investing in the company.
“For SNC to move beyond its current litany of troubles, the company must first identify what went wrong with its legacy internal controls and risk assessment processes, then fix the identified problems,” Yerashotis said in a note this month.
Card and Chief Financial Officer Alain-Pierre Raynaud are both on vacation and unavailable to comment, said Leslie Quinton, an SNC spokeswoman.
Engineering and construction “results continue to be challenging as we are still dealing with certain difficult legacy projects and we are going through a major transition period within the company,” Quinton said in an e-mail yesterday.
Libyan projects at the time of Qaddafi’s ouster included an airport, a prison and a water line network known as the Great Man-Made River, according to SNC’s 2010 annual report. The report described the prison, the Guryan Judicial City, as “the country’s first detention center to comply with international human rights standards.”
Denis Durand, senior partner at Jarislowsky Fraser Ltd. in Montreal, said he’s confident SNC’s Aug. 2 announcement represents a “pause” and won’t derail Card’s plans.
While Card may need to book new provisions related to Libya in the next year, they would likely not exceed “a few tens of millions” of dollars, said Durand, whose Montreal-based firm was SNC’s biggest investor as of February with a 9.9 percent equity stake.
“Most of the issues tied to North Africa are behind them,” Durand said in an interview. “They’ve ring-fenced the problem contracts. There was a lack of controls at the company, but the culture is changing.”
Michael Sabia, CEO of the C$185.9 billion Caisse de Depot et Placement du Quebec, today reaffirmed his support for Card and the “cultural turnaround” he is overseeing. The Caisse, Canada’s second-largest pension fund manager, owned 6.1 million SNC shares as of Dec. 31, making it the company’s No. 2 holder.
“They’ve been traveling down a difficult road, a very difficult road,” Sabia said on a conference call with reporters. “They are making progress. We’re a long-term investor, we’re a patient investor, we’re going to work with management and the board and try to get this company, this quality company, through a difficult patch in its history.”
Some deals may be in the works. SNC has identified assets it can sell “in the near term,” including concessions such as New York’s Astoria 1 and 2 power plants and the Malta International Airport, CFO Raynaud told analysts Aug. 2.
In addition, Raynaud said the company is “actively considering alternatives” for its AltaLink unit, which owns a power-transmission network in Alberta. Those “may include public market alternatives and/or bringing in an equity, strategic or financial partner to maximize the value of this investment,” he said without being more specific.
Card is working to reshape SNC amid rising costs and a global commodities slump that has slowed order intake from mining clients.
He’s also running the company with a revamped management team. Michael Novak, 59, the executive vice president responsible for government, aboriginal and economic affairs, said today by e-mail that he will retire at year’s “to go pursue other projects which I am very passionate about.” Novak, a 27-year SNC veteran, becomes the fourth high-ranking executive to leave in 2013.
SNC’s infrastructure, environment and power units should drive a rebound in profits while Card puts his stamp on the company, according to John Stephenson, who holds SNC shares among the C$2.7 billion he helps oversee as a portfolio manager at First Asset Investment Management Inc.
“It’s been a painful period but it’s almost over,” Stephenson said. “We have huge infrastructure issues globally, and these are not going away -- whether it’s water desalination or engineering work, this is something that SNC should be getting its fair share of. This is a chance for them to put their house in order, and they will.”
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