Buy SNC-Lavalin even as it restructures

Montreal-based SNC-Lavalin is one of the world’s leading engineering and construction groups and a major owner of infrastructure. It provides services in a variety of sectors including oil and gas, mining and metallurgy, environment and water, infrastructure and power. And now it is doing a big restructuring of its own operations.

It is downsizing and cutting 4,000 jobs which will cost it money in 2014. The charges and other factors will reduce its 2014 earnings from between 40 to 55 cents a share. The company aims to deliver cost savings and raise its profits in 2015 and beyond. SNC-Lavalin remains a buy for attractive and increasing dividends as well as long-term share price gains.

In reporting SNC-Lavalin’s third-quarter results, President and chief executive officer Robert Card said: “Over the past two years, we have made significant progress on our focused plan to become a global Tier-1 engineering and construction company.” Now he intends to implement “the next phase of its plan”. This involves restructuring the company.

The restructuring will reduce SNC-Lavalin’s earnings by $200 million over the next 18 months. At the same time, non-cash charges will reduce its earnings by another $100 million. The company plans to cut 4,000 jobs, or nine per cent, of its global workforce. It expects three-quarters of its cuts to occur abroad “in sectors and markets that face a more difficult operating environment”.

SNC-Lavalin’s earnings will grow in 2015

On the positive side, SNC-Lavalin expects its actions will add $100 million a year to its earnings, beginning in 2015. It also says that the restructuring and downsizing will improve its “agility”. Indeed, the company will consolidate and streamline some of its operations. It also says that the actions will improve its ability to “compete on a global scale”.

SNC-Lavalin revised its earning guidance. It now expects to earn from 40 to 55 cents per share less than expected for 2014. Besides the charges, this includes costs from its acquisition of Kentz. SNC-Lavalin writes that its guidance “takes into account . . . the continuing downturn in the mining and metallurgy sector and the heightened challenges of certain legacy projects”.

In the nine months to September 30, SNC-Lavalin’s revenue declined by 6.4 per cent to $5.421 billion. Revenue fell in all parts of the engineering and construction operations. This was only partly offset by a jump in its revenue from infrastructure concession investments. This revenue increased by over 38 per cent to $703 million.

Just keep in mind that it’s often profitable to buy companies that have reported temporary bad news. Particularly if future news is likely to get significantly better. SNC-Lavalin Group (TSX—SNC) remains a buy for attractive and increasing dividends as well as long-term share price gains.


The Investment Reporter, MPL Communications Inc.
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