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MONTREAL – Investors reacted harshly Thursday after Quebec construction and engineering giant SNC-Lavlin Group Inc. missed second quarter estimates, while company leadership said it is awaiting final notice on a handful of new contracts worth “hundreds of millions” of dollars and one that is “even larger.”
“We feel good about what we’ve been winning,” SNC-Lavalin CEO Robert Card said on an investor conference call later in the day.
“In spite of this really disappointing news this quarter, the whole operation feels a lot more on track.”
Shares tumbled 8.42 per cent Thursday to $40.05 in Toronto trading after the firm reported net earnings dropped 17.6 per cent to $26.5 million from $32.1 million. Net income of 17 cents a share (versus 21 cents a year earlier) lagged the 37-cent average estimates compiled by Bloomberg.
SNC shares have fallen 9.6 per cent this year, compared with a 1.6 per cent drop for the benchmark Standard & Poor’s/TSX Composite Index.
One analyst said the drop in the share price – the most in three years, according to Bloomberg – was an overreaction to an isolated problem.
“It looks like it’s more of a one-time miss than some sort of structural dynamic,” said Maxim Sytchev, head of research at Dundee Capital Markets. “The issue resides in one division and this is infrastructure. Everything else is doing quite well.”
SNC said this was driven by a $43.2 million pretax loss in the infrastructure division caused by difficult soil conditions along a transit tunnel and costs associated with an unnamed major Canadian highway project.
Although SNC would not identify either problematic project, the construction of B.C.’s Evergreen SkyTrain line has caused several sinkholes, which opened up during maintenance on the tunnel-boring machine.
“The tunnel project actually went quite well, but when we stopped the equipment for maintenance the soil conditions were surprising and it was difficult for us to hold pressure in the tunnel,” said Card.
“We have now instituted corrective measures for the next stops that are required and we don’t expect that problem again.”
Revenue rose 33 per cent from a year ago to $2.3 billion, and the company reported no change to its core earnings per share guidance of $1.30-$1.60.
“Given the fact that they are telegraphing in-line guidance, that means they should have the visibility to be able to correct that executional issue,” said Sytchev, who maintains a ‘buy’ rating on SNC – Canada’s largest engineering company – with a price target of $54.
Several large scale projects will also soon be reflected in the company’s backlog numbers, including the new Champlain bridge in Montreal and Toronto’s Eglinton Crosstown project.
Backlog was $12.4 billion at the end of June, compared to $8.2 billion a year ago and $12.3 billion at the end of December 2014.
“Right now we have the revenue opportunity to generate margin, but it’s up to the company to execute,” said Sytchev.
“The market is ascribing a $300 million valuation to a business with a $13 billion backlog. It’s just silly.”
SNC says the backlog increase compared to June last year is mainly due to last year’s $2.1-billion acquisition of the Kentz Corp. liquefied natural gas operation in Australia.
Fraud and corruption charges relating to deals with Libya are still hanging over the engineering firm, though under Card SNC has undergone restructuring and implemented new transparency and compliance measures.
The SNC leadership maintains the company is not guilty of although it would be willing to pay a fine if there were changes to the Canadian legal structure.
Lawyers representing SNC will have yet another few months to review the evidence against the company after being scheduled back in court for Oct. 16.
“That’s the journey that goes on for a very long time on that track, but we have no expectation that this is the track we are going to stay on,” said Card.
– With files from Bloomberg News