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Canada’s largest builder faces new growth risk amid Saudi spat

Canada’s largest builder faces new growth risk amid Saudi spat

Mubasher: As the diplomatic feud between Canada and Saudi Arabia is escalating, one of the major pillars of SNC-Lavalin Group’s growth plans stood at stake.

The Montreal-headquartered company has become embroiled in the dispute after Saudi Arabia froze diplomatic ties and new businesses agreements with Canada last week, a move that came after Canadian Foreign Minister Chrystia Freeland called on the authorities in Riyadh to release Saudi human rights activists from prison.

SNC gained more exposure to the oil-rich kingdom with two of its largest takeovers, the 2014 acquisition of Irish Kentz Corp and last year’s bid for UK WS Atkins, while the builder’s CEO Neil Bruce is relying on the Middle East business to boost the firm’s profitability over 50% by 2020.

However, the recent spat has sent a shudder of fear among investors in the Canadian company, with more than 11% of sales came from operations in Saudi Arabia.

SNC saw the steepest weekly decline in more than a year in the wake of the clash, while the shares on Monday traded in Toronto at 53.18 Canadian dollars (CAD) per share, dropping again by less than 1% and hitting the lowest price in over five months.

Although the magnitude of the risk of the strained relations between both sides poses to SNC cannot be quantified yet, “there is a range of outcome here,” Toronto-based AltaCorp Capital analyst Chris Murray told Bloomberg News via telephone, noting that the construction firm’s work in Saudi Arabia “isn’t exactly low-margin work.”

As SNC is still in the process of assessing the impact of any the rift, an almost CAD 1 billion ($760 million) in annual revenue from operations in Saudi Arabia remains at risk.

Moreover, the construction company’s another CAD 639 million of sales in the rest of the Middle East are at stake, given that countries such as the UAE took Riyadh’s side in the feud with Canada.

SNC also entered into an agreement with a joint venture (JV) between Saudi Aramco and Kuwait Gulf Oil to provide engineering services.

Canada’s largest construction company also has other non-oil businesses in Saudi Arabia, since Attkins was undertaking a subway project in Riyadh at the time of its acquisition.

The company is targeting a consolidated profit of CAD 5 per share by 2020, 56% higher than last year, while its backlog of future work hit a record high of CAD 15.2 billion as of 30 June.

SNC will certainly adjust with the situation, yet what remains to be seen “is how much of their future work will really be impacted, and no one can answer that right now,” Murray said.