August 3, 2012 / 1:18 PM / in 6 years

UPDATE 3-SNC Lavalin profit sinks, cuts outlook on higher costs

* Q2 EPS C$0.21 vs C$0.67 year earlier

* 2012 profit view cut on C$66 mln in project cost over-runs

* Q2 project execution was difficult, CEO says

* Bidding activity weaker, backlog could drop, CEO says

* Stock falls 5 pct to C$38.20 on the TSX

By Susan Taylor

TORONTO, Aug 3 (Reuters) - SNC Lavalin Group Inc, a Canadian construction and engineering company caught up in allegations of improper payments and bribery, said on Friday massive project cost overruns led a sharp drop in quarterly profit and forced it to cut its outlook.

Shares of the company, whose CEO resigned in the fall-out from its corporate misconduct scandal, fell 5 percent after the results. That extends a slide of more than 60 percent since SNC first announced mystery payments in February.

The troubled company said the global economic slowdown has slowed the demand for bids in some parts of its business, notably mining, and that its order backlog may wane in the next two quarters.

Investors have been nervously watching the company’s financial results and forecasts for signs that its business has been hurt by revelations that it made $56 million in payments to unknown agents on construction projects that did not exist.

“The miss in the quarter pertains to weaker than expected execution and not the issues that plagued the company since the departure of (CEO) Pierre Duhaime,” said AltaCorp Capital analyst Maxim Sytchev.

“If the actual results continue to lag relative to the again-dialed down expectations, (the) probability of an activist-type shareholder participation increases dramatically.”


The Montreal-based company said second-quarter net income sank to C$32.5 million ($32.4 million), or 21 Canadian cents a share, from C$102 million, or 67 Canadian cents, a year earlier.

Revenue rose to C$1.9 billion from C$1.7 billion.

RBC Capital Markets analyst Sara O’Brien described the results as “very weak,” with earnings of 21 Canadian cents a share well below her expectation of 68 Canadian cents a share.

“These results also serve to remind the fixed-bid business can be volatile and risky, particularly in a heightened competitive backdrop,” she said in a note.

SNC reduced its 2012 net income forecast to between C$325 million and C$340 million. That is down from its previous expectation that earnings would be in line with 2011, when it had a C$379 million profit.

It blamed C$50 million in additional costs at a power project in Tunisia, reflecting a change in management and staffing, and a C$16 million over-run for a hydrocarbons and chemicals project in Russia, for which it needed some work completed in higher-cost London.

“The second quarter was difficult in terms of project execution, but we are encouraged by our strong financial position and backlog,” said interim Chief Executive Officer Ian Bourne.

SNC had cash of C$1.2 billion at quarter-end, and its order backlog rose to C$10.7 billion from C$10.1 billion at the end of December.

“While recent quarterly results may lead some investors to question the company’s ability to translate its recent record backlog into solid profitability going into 2013 and 2014, we are of the view that margins should normalize,” said Desjardins Securities analyst Pierre Lacroix.


The company, whose CEO resigned in March after revelations that he authorized the mystery payments, expects to name a new chief executive by late September.

SNC has handed over information from its internal probe to the Royal Canadian Mounted Police, but shed little light on the scandal, an issue now the focus of a Swiss investigation probe.

The company has said it does not know who received the money or what it was used for, but stressed it was the work of “a relative few.”

It has said its former head of construction, Riadh Ben Aissa, who left the company in February, may have direct knowledge of the transactions. Swiss authorities have arrested Ben Aissa on charges of corruption, fraud and money-laundering.

Canadian newspapers have linked Ben Aissa in a negative light to the family of deposed Libyan dictator Muammar Gaddafi.

In a separate matter, two former SNC executives, accused of bribing officials in Bangladesh for a bridge project, have a preliminary Canadian court hearing set for next year. [ID: nL2E8HP5MO]

The World Bank canceled its $1.2 billion loan for the project last month, saying it had credible evidence of a high-level corruption conspiracy among Bangladeshi government officials. [ID: nL2E8HTIPC]

SNC, temporarily suspended from bidding on new World Bank projects in March, said it plans to respond to any allegations.

“Other than the temporary suspension ... no charges have been brought or sanctions imposed against the company in connection with these matters,” SNC said on Friday.

“It is not currently possible to predict the outcomes of these investigations and whether an penalties or other sanctions may be imposed against the company.”

SNC shares fell C$2.05 to C$38.20 on the Toronto Stock Exchange on Friday afternoon.

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