A rather vertiginous drop in UK construction earnings is weighing heavily on Balfour Beatty (BBY). The FTSE 250 constituent dives 20% to 230.2p on a profit warning and shock departure of chief executive Andrew McNaughton.

While most parts of the group are trading in line with expectations, the infrastructure specialist says the group will deliver significantly lower earnings this year. Pre-tax profit for 2014 is expected to be in the range of £145 million to £160 million, given current uncertainties in parts of the UK construction business.

This decline is largely down to what Balfour is describing as 'significant operational issues' in the group's mechanical and electrical engineering (M&E) and major buildings project business. Analysts reckon it is down to aggressive bidding for contracts and weak operational delivery.

Back in March, management highlighted adverse market conditions in the M&E space and first quarter performance was significantly below par. Cost increases and delays in major building have also added to construction headwinds.


The departure of chief executive Andrew McNaughton after 17 years at Balfour Beatty has come as something of a surprise and Steve Marshall, the group's non-executive chairman, will take over as executive chairman until a successor is appointed.

Even more surprising is the potential sale of Parsons Brinckerhoff, the mining-to-infrastructure services group acquired in 2009 for £380 million. This was funded by a deeply-discounted rights issue.

Balfour says it will only sell the unit if a deal provides 'attractive shareholder value'. Howard Seymour at Numis reckons that putting Parsons on the market 'is a surprise and investor concern is that this is a snap decision and could reflect balance sheet concern.'

Flagging the potential disposal ahead of an actual deal looks a dangerous move. Liberum Capital describes Parsons as a 'people business' meaning its real assets are the staff. By implying there's no future for Parsons in Balfour Beatty may prompt a mass exodus as staff seek to work elsewhere. That could reduce the potential disposal price for Parsons.

Taking account of lower UK construction profits and higher net debt, broker Numis is lowering its price target to 260p. Liberum slashes its price target from 350p to 280p.

Issue Date: 06 May 2014