Turnkey contracts continue to give SNC-Lavalin headaches
Several SNC-Lavalin subsidiaries are ineligible for public tenders in Quebec until January 2025.
Losses continue to accumulate for turnkey contracts of SNC-Lavalin, but the engineering firm hopes that division's significant losses are “largely behind us”.
The Montreal company surprised investors on Friday with a bigger-than-expected loss in the turnkey contract segment in the fourth quarter.
The division posted a loss of $150 million while analyst consensus was for a loss of $59 million, according to RBC Capital Markets.
SNC-Lavalin no longer bids on turnkey contracts since 2019, as these projects often experience cost overruns. It still needs to complete three before the activities of this division are completed, namely the Réseau express métropolitain (REM) in the greater Montreal area, the Trillium light rail line in Ottawa, and the Eglinton line in Toronto.
The Réseau express métropolitain during tests in Brossard. (File photo)
President and CEO Ian Edwards says SNC-Lavalin is finally seeing light at the end of the tunnel with turnkey contracts. He pointed out that the two projects in Ontario are physically complete and that the rest of the work is related to administrative elements such as obtaining permits and handing over the project to customers. He estimates the advancement of the REM at 75%.
Mr. Edwards assures that the riskiest part of the projects was related to construction. Issues that have arisen in the post-pandemic world: increased costs due to inflation in the price of materials and labor, supply chain disruptions supply, the difficulty in importing equipment, the strike and all the productivity issues we experienced during the pandemic, I see it as over.
SNC-Lavalin President and CEO Ian Edwards.
Accumulated losses for turnkey contracts do not exceed the $300 million envelope that management set for itself in March 2022. The company says the loss for 2022 is contained at 217 million dollars, so far.
Mr. Edwards reiterated that he hoped to recover from his clients some of the cost overruns related to the pandemic and the macro-economic context. He mentioned that negotiations are continuing. We are having detailed and collaborative discussions, but I cannot predict the outcome.
SNC-Lavalin also announced that it is undertaking a strategic review while some segments of the business are performing below industry standard.
“We want our performance, in all of our activities, to be in line with good industry performance. This is our goal. This is at the heart of our strategic review.
—Ian Edwards, President and CEO of SNC-Lavalin
Linxon, in which SNC-Lavalin has a majority stake, will be subject to the strategic review, he said. The subsidiary specializing in the electrification of projects recorded a loss of $14 million in the fourth quarter due, in particular, to cost overruns in Europe.
L' National Bank Financial analyst Maxim Sytchev hopes the company will spin off the subsidiary. Linxon should have been sold at the first warning signal, as we believe it is not a good company.
SNC-Lavalin reported fourth quarter results below analysts' expectations.
The company reported a net loss from continuing operations attributable to shareholders of $54.4 million, compared to a loss of 15.3 million in the same period last year.
Diluted adjusted loss per share was 19 cents, compared to a loss of 15 cents. Prior to the earnings release, analysts were instead expecting earnings per share of 22 cents, according to financial data firm Refinitiv.
“Overall, the good parts of the business delivered results in line with expectations, but key contracts in hand disappointed.
— Maxim Sytchev, Analyst at National Bank Financial
Engineering stocks tend to do well when they put projects behind them cumbersome, as SNC-Lavalin wants to do with turnkey contracts, underlines the analyst from Financière Banque Nationale.
He believes, however, that it is still too early to make this bet. There is a hidden value, but you will have to be very smart to choose the right moment. We have a preference for firms that only provide advisory services.
SNC-Lavalin stock lost 47 cents, or 1.62%, at 28.00. $53 on the Toronto Stock Exchange, morning.