SNC-Lavalin Raises 2014 Profit Target After AltaLink Sale

SNC-Lavalin Group Inc. raised its full-year profit target after agreeing to sell its AltaLink power-transmission unit last week for C$3.2 billion ($2.9 billion).

Per-share profit this year will range from C$2.80 to C$3.05, Montreal-based SNC-Lavalin said today in a statement. That’s up from a March forecast of C$2.25 to C$2.50 and doesn’t take into account the eventual gain from the sale of its interest in AltaLink.

Chief Executive Robert Card is reshaping SNC, Canada’s largest engineering company, to focus on its core business as hospital projects and softer commodities prices have weighed on profit. Selling AltaLink was key to Card’s vision as the unit required billions of dollars of investments over the next decade and Card said he’d rather use the cash in areas that offer greater potential for higher profits.

SNC is “progressing in the right direction,” Maxim Sytchev, an analyst at Dundee Securities Corp. in Toronto, said today in a note to clients. “With C$3.7 billion of pro-forma net cash post the sale, the crux of investors’ concerns is now shifting towards capital deployment.” Sytchev rates the shares buy.

SNC rose less than 0.1 percent to C$51.62 in Toronto. The stock gained 8 percent this year, exceeding the 6.8 percent advance of Canada’s benchmark Standard & Poor’s/TSX Composite Index.

Continuing Challenges

Net income rose 76 percent in the three months ending March 31 to C$94.6 million, or 62 cents a share, from C$53.6 million, or 35 cents, a year earlier, SNC also said today. The average of estimates compiled by Bloomberg was 46 cents.

SNC expects to pay C$250 million in taxes on the gain from the AltaLink sale, the company said today in a slide presentation posted on its website.

Sales dropped 9.5 percent to C$1.72 billion, short of the C$1.81 billion average forecast.

SNC said its revised earnings outlook is based on the view that “challenges will continue” in its infrastructure and construction as well as oil and gas divisions, due primarily to “challenging legacy projects,” and the mining and metallurgy unit that’s been affected by weaker commodities prices.

SNC’s backlog of future work climbed to C$8.37 billion at the end of March from C$8.29 billion three months earlier. The total includes C$728.8 million tied to “challenging legacy projects,” most of which involve hospitals and have resulted in cost overruns. At the end of December, those projects amounted to C$902.6 million.

Project Backlog

“Investors should be encouraged by the decline in the non-performing project backlog and the prospect of improving profitability from core engineering and construction activities,” Pierre Lacroix, an analyst at Desjardins Capital Markets in Montreal, said today in a note to clients. He rates the shares buy.

Profit in engineering and construction rose 66 percent to C$30.8 million in the period, SNC said. Profit from the company’s infrastructure and concessions holdings, such as AltaLink, jumped 82 percent to C$63.8 million.

Libya Risk

Results in the latest period reflect the reversal of a C$47 million risk provision that the company took a year ago in connection with an unidentified project in Libya. The letters of credit, which an unnamed party attempted to draw on last year, expired during the first quarter of 2014, leading to the reversal, SNC said.

During the latest quarter, SNC also recorded a provision of about C$11.7 million that the company said “covers in full the cash held in Libya.” SNC cited “the increasing risk on the availability of such funds, as difficult conditions in the country have worsened.”

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