Losses continue to pile up for SNC-Lavalin’s turnkey contracts, but the engineering firm hopes that division’s significant losses are “largely behind us.”
The Montreal-based company surprised investors on Friday with a larger-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 has 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.
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 progress 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 — rising costs due to inflation in the price of materials and labor, supply chain disruptions, difficulty in importing equipment, the strike and all the productivity issues we had during the pandemic — I see it as over. »
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, for the moment.
Mr. Edwards reiterated that he hoped to recover from his clients some of the cost overruns related to the pandemic and the macroeconomic context. He mentioned that negotiations are continuing. “We are having detailed and collaborative discussions, but I cannot predict the outcome. »
A strategic review
SNC-Lavalin also announced that it is undertaking a strategic review as some segments of the business are performing below industry standard. “We want our performance, in all our activities, to match the good performance of the industry. This is our goal. This is at the heart of our strategic review,” Mr. Edwards said.
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.
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. »
Results below expectations
SNC-Lavalin announced results below analysts’ expectations in the fourth quarter.
The company reported a net loss from continuing operations attributable to shareholders of $54.4 million, compared to a loss of $15.3 million for the same period last year.
The diluted adjusted loss per share was 19 cents, compared to a loss of 15 cents. Prior to the earnings release, analysts were instead anticipating earnings per share of 22 cents, according to financial data firm Refinitiv. “Overall, the good parts of the business showed results in line with expectations, but the turnkey contracts disappointed,” summarizes Mr. Sytchev.
The shares of engineering firms tend to do well when they put behind them cumbersome projects, as SNC-Lavalin wants to do with turnkey contracts, underlines the analyst of National Bank Financial. 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 consulting services. »