SNC Lavalin plunges most in almost 30 years after profit warning over ‘serious problem’ in mining

SNC-Lavalin Group Inc. dropped the most in at least 27 years after the builder warned it would miss its full-year profit target due to a “serious problem” with a mining contract. It also wrote down the value of its energy unit by $1.24 billion amid a diplomatic spat between Canada and Saudi Arabia.

SNC plummeted 24 per cent to $36.97 at 9:38 a.m. in Toronto. Earlier the stock dropped as much as 31 per cent, its biggest intraday decline since at least January 1992, according to data compiled by Bloomberg. The plunge wiped out almost $1.8 billion in market value and pushed the stock to a three-year low.

“We are disappointed by this morning’s announcement, in addition to being surprised by the change in tone in connection with business relations with Saudi Arabia,” Benoit Poirier, a Desjardins Capital Markets analyst, said Monday in a note to clients. “Management is also taking a more cautious view toward its 2019 outlook to reflect these uncertainties.”

Adjusted profit from engineering and construction will be $1.15 to $1.30 a share in 2018, SNC said in a statement Monday. That’s down from an earlier forecast for profit of as much as $2.85 a share. Overall profit for the year will be $2.15 to $2.30 a share, short of the $3.60 to $3.85 range that the Montreal-based company provided as recently as November.

SNC said it incurred additional costs in the fourth quarter to deliver the unidentified mining and metallurgy project. In addition, the company “cannot meet the required level of agreement” with its client to book revenue.

Unacceptable

“This isolated incident is unacceptable and I intend to take appropriate actions to mitigate the financial impacts for the company,” chief executive Neil Bruce said in the statement. SNC didn’t identify the troubled project, saying only that the contract was awarded in 2016.

The announcement dials up the pressure on SNC following the refusal last year by Canadian prosecutors to reach a negotiated settlement with the company over past corruption charges. The lack of a deal with Canada has probably cost SNC more than $5 billion in lost revenue and continues to damage its reputation internationally, Bruce told BNN Bloomberg TV in an interview last month.

SNC said it would “aggressively” pursue project claims through the contract protocols “up to and including engaging in a dispute resolution process.”

Worse than expected trading challenges in oil and gas in the Middle East — and Saudi Arabia in particular — also weighed on fourth-quarter results, SNC said. More than 15 per cent of the company’s global workforce is employed on work in Saudi Arabia, which has been a key source of revenue growth in recent years.

Frozen Ties

Saudi Arabia froze diplomatic ties and new business deals with Canada in August, following a call by Canadian Foreign Minister Chrystia Freeland for Saudi human rights activists to be released from prison.

The dispute sparked SNC to write down the fair value of its oil and gas segment by $7.06 a share, as a result of impairment tests. “Inter-governmental relations between Canada and Saudi Arabia, together with unpredictable commodity prices and uncertain client investment plans, have led to deterioration in our near-term prospects which we cannot ignore,” SNC said.

Next year’s results will also be affected, SNC said Monday. SNC will provide 2019 targets when it releases final fourth-quarter results on Feb. 22.

“Unavoidably we will take a more cautious view towards our 2019 prospects to reflect these uncertainties,” the company said without being more specific.

Bloomberg.com

Published at Mon, 28 Jan 2019 16:52:30 +0000