SNC Declines as Strategic Plan Seen Lacking Substance

SNC-Lavalin Group Inc., Canada’s largest engineering company, fell to its lowest in more than three months after posting a decline in first-quarter profit and saying it will consider paring some infrastructure holdings.

“Non-core infrastructure and concession assets” may be unloaded, and equity stakes may be reduced in “principal large investments,” SNC-Lavalin said. The shares slid 4.5 percent to C$41.51 at the close in Toronto, their lowest price since Jan. 8 and biggest percentage decline since March 8.

Chief Executive Officer Robert Card is trying to reshape the Montreal-based company after a corruption scandal involving his predecessor triggered a fraud probe and investor lawsuits. He told analysts in November that SNC-Lavalin was assessing which infrastructure concession investments to keep. Owning such assets, including Alberta-based power-transmission company AltaLink and a minority stake in Ontario’s Highway 407, has helped the company win construction contracts in recent years.

“There’s not a lot of substance here, other than what they articulated back in November,” Trevor Johnson, an analyst at National Bank Financial, said in a telephone interview from Toronto. “But I was expecting something with more meat on the bone.”

The infrastructure concession assets have a combined value of C$26 a share, including C$12 for the Highway 407 stake and C$9 for AltaLink, Sara O’Brien, an analyst at RBC Capital Markets in Toronto, said in an April 29 note to investors.

Highway, Altalink

“Short term, they might monetize some of their nickel and dime business,” said Johnson, who like O’Brien rates the shares as sector perform. “In the medium term, if they can get a good equity partner, a good valuation, they might sell some of their equity in Highway 407 and or AltaLink.”

SNC-Lavalin also said in a statement it intends to expand its resources units, including oil and gas, mining, environment and water, to execute an “accelerated growth strategy” in the Americas. The company said it expects to make “strategic acquisitions” in resources.

First-quarter profit fell 19 percent as costs increased on two contracts, SNC-Lavalin said.

Net income declined to C$53.6 million ($53.2 million), or 35 cents a share, from C$66.3 million, or 44 cents, a year earlier, SNC-Lavalin said. Revenue rose 6.3 percent to C$1.9 billion, in line with the average of five analyst estimates compiled by Bloomberg.

The results include C$32 million in additional costs from an undisclosed infrastructure project, as well as C$17 million in provisions for costs in connection with a mining contract that was suspended, SNC-Lavalin said. The provisions led to operating losses in two of the company’s units: infrastructure and environment, and mining and metallurgy.

“Their earnings were pretty weak,” National Bank Financial’s Johnson said. “They continue to have execution issues. Their engineering and construction business seems to be having issues every quarter.”

The company’s backlog of future contracts rose to C$10.2 billion at the end of March, from C$10.1 billion on Dec. 31.

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