Web Exclusive Follow-Up: SNC-Lavalin Group (SNC)

SNC-Lavalin Group, Inc. (SNC) was recommended in Investment Digest issue 691 dated March 16, 2011, at $54.58 by both The Investment Reporter and The Successful Investor. Both newsletters recently provided updates on the stock after it reported surprising earnings. First, Patrick McKeough, editor of The Successful Investor:

“SNC-Lavalin Group, Inc. (SNC on the Toronto stock exchange) fell over 20% on February 28, 2012 after it announced that its 2011 earnings will be $80 million, or 18% below its earlier forecast. In 2010, SNC earned $437.0 million, or $2.87 a share.

“The earnings drop is partly due to $35 million in unusual payments related to certain construction contracts. Because of the recent civil war, SNC will also write down the value of its Libyan operations, including a prison, an airport and a water treatment system, by $23 million. The company did not say if the unusual payments are connected to its Libyan projects.

“SNC is working with its external auditors and lawyers to examine these payments and certain other contracts.

“The earnings warning has also spurred a $250-million class-action lawsuit that accuses SNC of conducting ‘unlawful activities in Libya.’ SNC has denied the charges.

“Even with this uncertainty, SNC continues to win new contracts, including a $475-million deal to refurbish four reactors at Ontario’s Darlington nuclear-power complex. Brazilian mining company Vale SA has also hired SNC to modernize its nickel smelter in Sudbury, Ontario. SNC-Lavalin is a hold.”

Pat McKeough, The Successful Investor, March 9, 2012

The second follow-up comes from Mark Johnson, editor of The Investment Reporter:

“We’ve temporarily downgraded SNC-Lavalin Group, Inc. (SNC on the Toronto stock exchange) to a hold. This follows a profit warning from this Key stock that immediately knocked down its share price by nearly 21%.

“SNC fell from a close of $48.37 a share on February 27 to a close of $38.43 a share on February 28. The fact is, the market punishes companies that release nasty surprises.

“On February 28, SNC warned that its 2011 net income would come in about 18%—or $80 million—below its previous forecast. The lower net income is primarily due to three negative factors. First, SNC will take a loss of $23 million from ‘a revised position’ of its ‘net financial exposure’ on its projects in Libya. It seems that there’s a controversy brewing about the company’s operations in Libya under former dictator Moamar Ghadafi.

“Second, SNC raised its cost forecasts on some projects in its Infrastructure, Environment, Chemicals and Petroleum segments. Higher-that-expected costs, of course, will cut the company’s net income.

“Third, SNC had to book $35 million in unexpected expenses. This comes from payments made ‘that were documented to construction projects to which they did not relate and, consequently, had to be recorded as expenses.’ SNC has launched an independent investigation into the facts and circumstances that led to the $35 million of payments in this and ‘certain other contracts.’ The company also retained independent legal counsel in this regard. Does this mean that it was swindled? SNC writes that its directors are ‘taking steps to implement changes and further appropriate actions arising from the investigation.’ This will ‘permit the auditors to deliver their audit report on a timely basis.’

“The company says it will report its 2011 financial results as soon as it can. SNC says that it will do so before March 30.

“SNC’s profit warning is disappointing. But the plunge in its share price could end up being a buying opportunity. Remember that the company operates in over 100 countries worldwide. While problems in some countries are bound to crop up from time to time, SNC should manage to make lots of money abroad. And it has an excellent record of raising its dividend year after year. In the meantime, however, we’ve slapped a temporary hold rating on SNC-Lavalin. Before buying, we want to see what management has to say.”