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Balfour Beatty issues another profit warning - this time it's £75M - latest

Balfour Beatty revealed a fresh £75M black hole in profits at its struggling Construction Services UK business this week. The announcement on Monday came just months after a £35M profit shortfall was reported for the division in July.

Since May 2013 the group has recorded lost profits of £190M largely from Construction Services in a drip feed of shock warnings.

Chairman Steve Marshall said he would be leaving the business once a chief executive has been appointed to fill the vacancy left by Andrew McNaughton who stepped down in May this year. That appointment is expected “within weeks”. A new non executive chairman has already been lined up, Marshall told analysts this morning.

“We have continued to experience programme slippage, resources and skills shortages, poor operational delivery and cost inflation pressures”

Britain’s biggest contractor has also called in management consultant KPMG to undertake a detailed review by the end of the year of the Construction Services contract portfolio including new wins. The consultant will be looking in detail at Balfour Beatty’s performance in its core skill area of contracting, focusing on commercial controls, “cost to complete”, contract value forecasting and reporting on a series of troubled projects mostly in the London building market.

Industry bosses professed themselves staggered at the latest revelation with “embarrassing” being the most common term  used to describe the announcement .They all pointed out that effectively Balfour Beatty which has been in contracting for over 100 years has called in an accountant/management consultant to advise it on how to do the day to day job of contracting.

Analysts too expressed concern that  KPMG was looking into what is “the core skill set a contractor should have to be able to properly execute its business," as  Will Morgan of Goldman Sachs put it in the investors and analysts conference call. He wanted to know if there had been a breakdown of trust or whether the company was unable to rely on the analysis of local managment.

Steve Marshall replied:  “To speak plainly, the company has had a series of surprises and has been surprised itself. This isn’t about a break down of trust between any part of the company. The problem is we have all been surprised and the board has judged that the right thing to do to give the company the assurance it needs, and frankly the investors the assurance they need,  is to have an independent review; and  to make it a thorough one, penetrating to project level and trace through the organisation (looking at) judgement, information flows and report back to the board." KPMG’s findings will be published Marshall said.

The decision to bring in KPMG  followed a tense weekend for the board after internal reviews forecast the further £75M profit shortfall due to additional losses and write downs across a number of contracts.

Engineering Services accounts for £30M of the loss, £20M is from large London building projects, £15M from regional construction and for the first time Balfour Beatty’s high performing major infrastructure projects team has a £10M problem.

“We have continued to experience programme slippage, resources and skills shortages, poor operational delivery and cost inflation pressures,” the Balfour Beatty trading statement said.

Engineering Services accounts for £30M of the loss, £20M is from large London building projects, £15M from regional construction and for the first time Balfour Beatty’s high performing major infrastructure projects team has a £10M problem.

London is at the root of at least two thirds of the losses. In Engineering Services which has been operating as a Tier 2 contractor, the £30M write down relates to 25 London jobs, 21 of which had been disclosed in July and 19 of which will complete this year.  The large London building projects were transferred to regional construction earlier this year and have “experienced further programme slippage and increases in costs".

The South West and Wales regions have had “continued difficulties”. And major infrastructure has been hit by changes of scope “where commercial resolution is yet to be concluded”, the trading statement said.

In July the contractor announced it was withdrawing from housing in the south west, was closing the Exeter offices and that Engineering Services was pulling out of trading in London with Tier 1’s.  Regional construction and civil engineering managing director Mark Cutler left the business last week. The four regional construction MD's will report directly to Construction Services chief executive Nick Pollard. And the regional finance director role currently filled by Bev Dew will not be filled when he leaves to join Kier at the end of the year.

The company pointed out that 16 out of 19 of its regional units were trading profitably.

The firm has put a stop on the aggressive bidding for smaller contracts that was a feature of the recession for many major contractors. “We are moving rapidly away from those waters,”  Nick Pollard told analysts. “That is the change we have been making in the regional businesses.”

Sale of Parsons Brinckerhoff is still on course, the trading statement said and “it is anticipated that up to £200M will be returned to shareholders in the form of a share buyback programme subject to the disposal completing”.

Marshall also told analysts in relation to what was seen as cautious wording that: “Our current intention is to effect a buyback. But we think investors will understand that we will want to have regard to trading circumstances at the time.”

He also announced that Balfour Beatty’s first PPP disposal was likely to come in “at a premium to the recently revised directors’ valuation”.

Balfour Beatty’s shares were trading 21% down at 177p and analysts cut year end profit forecasts to zero after publication of the trading update. Shares were up slightly at 186p on Tuesday. However analysts are concerned that the KPMG review will unveil further problems. 

If you would like to contact Jackie Whitelaw about this, or any other story, please email jackie.whitelaw@infrastructure-intelligence.com.