SNC-Lavalin conducting strategic review after weaker-than-expected fourth quarter earnings

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Canadian engineering giant SNC-Lavalin Group Inc. SNC-T is exploring its options for selling assets, as it pushes on with a corporate overhaul now in its fourth year.

Senior executives are conducting a strategic review to optimize the company’s portfolio of businesses to make sure capital and human resources are directed to areas with the highest profit and growth potential, SNC-Lavalin said in a statement Friday, which accompanied fourth-quarter results.

The Montreal-based company singled out for immediate review was Linxon, a joint venture with Hitachi Energy that specializes in electrical AC substation projects. Its capital assets will also be analyzed, chief executive Ian Edwards said.

SNC-Lavalin has a portfolio of 15 capital investments with a combined fair market value of $2.4-billion, according to the latest investor presentation on its website. They stretch across the country, from a 20-per-cent ownership position in the John Hart power generating station near Campbell River, B.C., to a 20-per-cent stake in the Restigouche Hospital Centre in Campbellton, N.B. The company also has a 6.76-per-cent stake in Toronto’s Highway 407 toll road, worth an estimated $1.6-billion on its own.

“The importance of the 407 becomes less” to SNC-Lavalin as the company transforms its business and generates consistent positive free cash flows, Mr. Edwards said on a conference call. “I wouldn’t say it’s in the review immediately, but there will be a time when it will be in the review.”

Mr. Edwards, named SNC-Lavalin’s CEO in 2019, is trying to re-establish the corporation as a go-to partner for governments and other customers, as it claws its way back from years of crisis. He has reshaped the company by selling oil and gas assets, and pivoting toward a new business model centred on engineering services and consulting work, while riskier fixed-price construction contracts that sucked cash for years are wound down.

“Significant opportunity lies ahead for SNC-Lavalin as governments and public entities across the world make structural decisions for a greener power grid,” Mr. Edwards said, noting the company added 3,000 net employees over the past 12 months. “Our end-to-end engineering services and nuclear capabilities position us as market leaders to support these global initiatives.”

On Friday, SNC-Lavalin reported weaker-than-expected earnings for its latest quarter. The company tallied a net loss from continuing operations of $54.4-million or 31 cents a share for the three months ended Dec. 31, 2022. That compares to a net loss of $15.3-million or nine cents a share for the same quarter the year before.

Consolidated earnings before interest, taxes, depreciation and amortization amounted to $20.2-million for the quarter, lower than the $135-million analysts were expecting. Revenue for the period was largely unchanged at $1.9-billion.

The company continues to be hamstrung by its remaining fixed-price construction contracts, posting a $150-million EBIT loss on that segment during the quarter. It said a year ago that it expects to incur maximum losses of $300-million to complete the contracts in a worst-case scenario and has now reached about $217-million of that amount.

Three big project contracts remain, all of them light-rail transit systems: The Eglinton Crosstown LRT project in Toronto, the Trillium Line expansion project in Ottawa and the Réseau express métropolitain in Montreal. All of them have encountered problems of one kind or another, including high construction and materials inflation rates, increased worker absenteeism, and issues obtaining construction materials in a timely way.

In one of the Ontario projects, about 62 per cent of workers stayed home at some point during the first three months of last year because of COVID-19, SNC has previously said. Now, both projects in the province are largely physically complete. The backlog of work to be done in dollar terms stood at $686-million at the end of December versus $1.17-billion the year before.

Owning a stake in Highway 407 has been “very valuable” for SNC-Lavalin over the years, Mr. Edwards said. Proceeds from the highway’s dividend payouts has provided a reliable stream of cash to counter the cost of wrapping up construction projects over the years.

SNC-Lavalin still needs Highway 407 for another reason, according to National Bank equity analyst Maxim Sytchev: the boost it gives to its credit profile. He doesn’t see SNC-Lavalin seriously mulling a divestiture of the stake before 2025.

“It’s a super solid asset in a growing GTA,” Mr. Sytchev said in an interview, referring to the Greater Toronto Area.

SNC-Lavalin will want to get the most it can for the stake and will likely be able to garner a higher multiple once traffic on the highway returns closer to pre-pandemic levels, he said. Trips on Highway 407 were down 21 per cent for the last three months of 2022 compared with 2019, reflecting work-from-home trends.