SNC-Lavalin Group Inc. is exiting the business of “lump-sum turnkey” construction contracts, but analysts say the embattled engineering firm’s existing backlog could still present some problems.
Montreal-based SNC announced in July that it would move away from the fixed-price projects, which its interim CEO said were “the root cause of the company’s performance issues,” and instead “focus on the high-performing and growth areas of the business,” such as design and engineering services.
Since then, the company’s stock price has continued its descent, with shares down more than 60 per cent for the year. On Tuesday, following more tough talk from the firm’s biggest shareholder, SNC’s stock price fell more than eight per cent to close at $16.36.
While some analysts are taking a wait-and-see approach when it comes to the company’s new direction, further issues with the lump-sum portfolio remain a possibility.
Raymond James analyst Frederic Bastien wrote in a recent note that there were still “a handful” of early-stage projects for SNC “that could turn problematic, if left unchecked.”
“All things considered,” Bastien said, “we feel there are still good reasons to watch the stock from the sidelines.”
SNC has also come under pressure from its biggest shareholder, the Caisse de dépôt et placement du Québec, which owns approximately 20 per cent of its shares.
While the Caisse had noted in July that SNC’s performance was “a cause of growing concern,” on Monday the fund’s chief executive had even stronger words, calling on SNC to urgently improve the quality of its execution, according to reports.
Both the company and some analysts who cover it say changes could take time to bear fruit, which may not be what investors who watched the value of their SNC shares plummet want to hear.
SNC has said it will fulfill its contractual obligations and phase out its $3.4-billion backlog by the end of 2024.
Interim president and CEO Ian Edwards said last week that it was some of the larger fixed-bid contracts that had been “value destructive” for the industry.
RBC Capital Markets analyst Derek Spronck said in a report that “management must continue to articulate their vision and execute on it.”
“As SNC winds-down its $3.4-billion fixed-bid project backlog, there remains the potential for material cost overruns,” Spronck wrote. “No question that risk is real. However, we believe it has been more than accounted for at current valuations.”
Fitch Ratings said in a commentary Tuesday that recent Canadian infrastructure conferences have seen contractors complaining “that in the effort to achieve ‘value for money’ and maximize profits, government counterparties and equity sponsors are pushing too many risks down to the contractors, resulting in fixed-price projects becoming unprofitable.”
According to Fitch, SNC’s decision to back off from bidding for such business highlighted that the market for public-private partnerships “has become increasingly competitive,” and that project completion remains a key risk.
“There are still projects that they’re working on, that could potentially run into difficulties down the road,” said Mario Angastiniotis, director of Canada infrastructure and project finance for Fitch. “Now, that’s speculative, obviously. You don’t know; they might just turn out to be perfect. But … as it stands right now, they indicated that they plan to follow through and finish whatever contracts they were involved in.”
A spokesperson for SNC said in an email that the company “will remain a major player in the Canadian Infrastructure market and is fully committed to the whole Canadian market.”
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