SNC Lavalin (TSX:SNC) shareholders have been through a whirlwind. Mired in legal battles over accusations of bribery, contract disputes and forced to pull out of one of its best growth markets (Saudi), it hasn’t been a good year for the company.
Over the past year, its value has been more than halved and its share price is down 41% in 2019. Whereas some view this as a buying opportunity, there are just too many uncertainties. The risk to reward profile just isn’t attractive.
This point was further hammered home as the company announced some fairly major news today.
Let’s start with the negative.
A bad year just got worse
Since the beginning of the year, SNC has announced several downgrades to guidance and some big impairment charges. Queue the music once again.
This time, instead of reducing guidance, the company has done away with 2019 guidance altogether.
SNC Lavalin will be announcing second quarter results on August 1st. Investors who were expecting some good news are going to be disappointed as the company pre-announced that results will come in significantly lower than expected.
It is expected to take yet another impairment charge – this time to the tune of $1.9 billion related to its oil & gas business. Why the big charge? SNC announced that it will be exiting the lump-sum turnkey (LSTK) contracting business and will stop bidding on these types of projects. It is anticipated that adjusted EBITDA will be negative $162.5 million at the mid-range.
The company is struggling to find its footing and as such, it announced a reorganization in light of its current challenges.
It is breaking out into two segments – SNCL Engineering Services and SNCL Projects.
The Engineering Services line is broken down into four professional services categories – EPDM, Nuclear, Infrastructure Services and Capital. The Projects segment only has two categories – Resources, which combines oil & gas and mining and Infrastructure EPC.
The reorganization can be both a positive and a negative. The company is trying desperately to regain investor confidence and at times, reorganizations have been used to mask underlying issues.
In SNC Lavalin’s case, it appears to be a positive. In looking at the revised segment disclosure, it is clear where the company is struggling and where it is growing at a healthy rate. Its Engineering services which accounts for approximately 57% of revenue is the company’s strong point. On the flip side, there is a real downtrend in its Projects segment.
It is important to keep in mind, that the revised segment disclosure only reflected numbers as of December 2018. We know 2019 has been a bad year for the company.
Despite its best efforts, consider this investor un-impressed. It is still engaged in several litigation and the negative surprises keep coming. Until the bleeding stops, its best to sit on the sidelines.