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SNC-Lavalin shares sink on profit warning

Pedestrians walk past a sign for the head office of SNC Lavalin in downtown Montreal March 26, 2012. REUTERS/Christinne Muschi
Pedestrians walk past a sign for the head office of SNC Lavalin in downtown Montreal March 26, 2012. REUTERS/Christinne Muschi

By Susan Taylor

TORONTO (Reuters) - Shares of embattled Canadian construction and engineering company SNC-Lavalin Group Inc tumbled as much as 7 percent on Wednesday, after the company again slashed its 2013 profit forecast, raising worries about its recovery.

SNC, which has struggled in the wake of a far-reaching corruption and ethics scandal that toppled senior executives, primarily blamed cost overruns on fixed-price contracts in North Africa and its hospital and roads division signed between 2010 and 2012.

The company cited those contracts for the weaker outlook, along with a C$75 million ($72 million) charge for a European reorganization and weak mining demand. It marks the second time SNC has cut its 2013 profit forecast since the estimate was announced in March.

Shares of Montreal-based SNC were down 5.1 percent at C$41.85 on the Toronto Stock Exchange on above-average volume.

Shares have slipped some 13.5 percent since late February 2012, just before the company announced it was investigating mystery payments for certain construction projects.

Analysts said that management may see the hefty one-time charges as the means to a fresh start. Chief Executive Officer Robert Card took the helm last October and Chief Financial Officer Alain-Pierre Raynaud was named in April.

"It kind of cleanses the palate, so to speak, for the new management team to really show what they can do and not be saddled by contracts that have been signed by previous management," said Morningstar analyst Todd Wenning.

"I think 2014 will be his (Card's) year to really show what his polices are going to do."

SNC said late on Tuesday that it sees 2013 profit at C$10 million to C$50 million, down sharply from an earlier estimate of C$220 million to C$235 million. Analysts expected a profit of C$226.83 million, on average, according to Thomson Reuters I/B/E/S.

SNC, which is scheduled to report third-quarter results on November 1, also said it will focus on high-margin projects.

"The principal goal for the company is to continue to push through the difficult aspects of certain projects of the current backlog and actively pursue potential claims," Card said in a statement.

Card announced a turnaround plan in May, which focuses on resource and lower-risk markets like North and South America as well as liquidating some infrastructure investments.

MORE TO COME?

While most analysts do not expect further charges related to project cost overruns, they agree that is a risk in the volatile engineering and construction industry.

"I have covered the construction sector long enough to know that these issues are never behind until a contract is actually complete," said Raymond James analyst Frederic Bastien.

"The E&C (engineering and construction) business can be volatile. It's not for the faint of heart ... in the longer term, investors will be rewarded for buying the stock, if they can stomach the volatility."

A C$40-price range for SNC stock represents a good entry point, Bastien said, but some analysts suggest investors may we wary.

"Given the recent management changes, macro headwinds, potential fines, and possibility of further negative developments, we believe investors will need a lower stock price to be compensated for the risks in the business," BMO Capital Markets analyst Bert Powell wrote in a note.

RBC Capital Markets analyst Sara O'Brien said the recurring write-offs could also trouble credit rating agencies and lenders.

While SNC does not currently use much credit, given its large fixed-bid construction business, it needs access to credit lines to provide letters of guarantee, she said in a note. At the end of 2013, the company had C$2 billion in letters of guarantee issued, she wrote.

Standard & Poor's Ratings Services cut its long-term corporate credit and senior unsecured ratings on SNC in May, saying that it expected high administration costs from the company's ethics scandal will hurt profitability. ID:nL2N0E32IS]

Former SNC top executives, including the CEO, have been charged with bribery and corruption for activities in countries including Libya, Canada and Bangladesh.

($1 = $1.0369 Canadian)

(Reporting by Susan Taylor; Editing by Chris Reese and Marguerita Choy)

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