Balfour operation has run into problems with UK contracts

Companies

Balfour Beatty searches for way ahead after yet another profit warning

10 July 2014 | By David Rogers | 0 Comments

Shares in Balfour Beatty fell 17% last Thursday after the contractor used a trading update to warn that profit at its M&E arm would be £65m below expectations. The company, which is the largest construction group in the UK, said a “further worsening” of the division’s performance had been caused by design changes, alterations and contractual delays to projects, “predominantly in the London area”. It added that these problems predated the firm’s recent changes of management. 

Balfour has dismissed its senior management twice in the past two years, each time in response to the poor performance of its UK businesses. The last chief executive to fall on his sword was Andrew McNaughton in May, after the firm issued a $270m profit warning. 

Steve Marshall, the firm’s new executive chairman, has said he expects it will take 12 months to restore the company to good working order. His plan is to sell off Parsons Brinckerhoff, the professional services arm it bought for $626m in 2009 and limit its M&E activities to projects where it had greater input into the design. 

These changes effectively end Balfour’s strategy of becoming a one-stop shop for clients, and signal the resumption of a more conventional main contracting role. 

The company last month sold its interests in two public-private partnership assets – a hospital in Durham and a school in Merseyside – generating total gains on disposal of $87m. 

Stephen Rawlinson, an analyst at Whitman Howard, told the Financial Times: “The steady drip feed of the family silver into the market when profit and cash are lower than expected in the main operations is not likely to maximise the good work the company has done to create the assets in the first place.”

Meanwhile, the firm has continued a run of success in winning work in the UK and elsewhere. On the day of the profit warning it also announced that it had reached financial close on a PPP contract to build two acute care hospitals in Vancouver, Campbell River and Comox Valley. Although the firm will not construct the facilities, it will manage the work and take up a $16m equity stake. 

At the end of June, its joint venture with Cavendish Group won a $274m silo construction order at the Sellafield nuclear reprocessing plant and it road building arms won a $1.3bn contract to deliver the Aberdeen Western Peripheral Route for Transport Scotland.

The firm has said its total order book stands at $22bn and that it expects to make a profit of about $270m.