A second profit warning in six months has shattered market confidence in Balfour Beatty (BBY). The shares have today fallen 10.8% to 219.9p, taking the heavy construction specialist to a five-year low.
The £1.5 billion cap builder expects full-year profits at its UK arm to be £50 million below expectations, blaming challenging conditions and changes in procurement trends in the UK market for the steep fall in forecast earnings.
Given the parlous state of the UK construction industry as evidenced by the recent UK GDP data on 25 April, which revealed that construction output in the UK fell 2.5% in the last quarter, a profit-warning from a UK construction company is perhaps not all that surprising.
What was disappointing was the £10 million profit deterioration in rail operations in Germany and the weakness in professional services in Australia.
The group's last profit warning on 8 November 2012 flagged a £10 million hit to profits because of weak construction and rail markets across Europe. Since then, Balfour's shares have fallen by about 30%.
That profit-warning necessitated what was to all intents and purposes a root and branch review of its UK contracts. After reviewing 950 contracts in the UK, around 100 have been subjected to closer scrutiny and it's apparent that some of the group's contract teams have not gotten to grips with changes in procurement trends. This has allowed customers to impose increasingly stringent conditions on contractors. These contract problems have been a significant contributor to Balfour Beatty's woes and the anticipated 20% drop in UK sales.
Some strategic disposals, such as its underperforming European rail concerns and its Workplace business may offer the potential to pull a ‘rabbit out of the hat', according to Andrew Gibb at Investec. He remains a seller because 'looking at the business on a pure underlying basis (excluding PPP disposal gains and JV profits), the group EBITA margin was just 2% (2011: 2.9%, 2010: 3.1%). With £305 million of cash also exiting from the business, we would question the resilience of numbers.'