Balfour Beatty shares slump as it ponders ‘strategic pull-out’

Shares in the company plunged by more than 18 per cent after it warned it would miss its profit guidance for 2012, blaming a dearth of major projects.

Chief executive Ian Tyler admitted: “We are definitely in a world where we are having to look at desisting from certain areas of the market.”

In its third-quarter trading update, Balfour, which employs 50,000 worldwide and has worked on high-profile projects including the Olympics Aquatics Centre in London, said profitability this year will be “slightly lower than expected at the time of the half-year results”. It added that the shortfall will be slightly offset by a lower tax rate.

The group order book also fell in the third quarter, closing at £14.4 billion at the end of September, down from £15bn at the end of June.

Weakness in the construction sector, around 30 per cent of Balfour’s business, has squeezed margins across the industry since the 2008 property slump took hold in the UK and US.

Andrew Gibb at Investec who has a “sell” recommendation on the stock, blamed a lack of major contracts which historically the firm has used to differentiate itself “to get a bit of margin”.

“They’re having to go further down the food chain in terms of looking for work. We have for a long time argued that pressure on construction would ultimately feed through to margins and cash, and this is now the case.”

Balfour said it was specifically reviewing its rail construction operations in light of critically low activity levels in Italy and Spain as well as low margins in the UK and Germany.

When asked about the possibility of pulling out of Italy and Spain altogether, deputy chief executive Andrew McNaughton said it was a consideration.

“What we’re trying to figure through is what parts we can be viable in and which parts are not viable for our shareholders,” he added.

The group aims to publish results of the review in the early part of next year.

Tyler said he believes more clarity is needed from the UK government in areas such as energy market reform.

“The government themselves recognise that there is a gap between their aspirations in infrastructure and what they have delivered,” he said.

Investec’s Gibb also warned that sector was showing little signs of improving in the short term.

“2013 is going to be tough if not tougher than 2012. People are forecasting some modicum of improvement in 2014 but that is dependent on political will.”

But Andy Brown at Panmure Gordon said he remained positive on the group’s prospects due to its broad spread of global interests.

“The spending outlook is mixed for the group but its international diversification broadens its opportunity,” he said.

The 103-year-old company is involved in a number of projects across Scotland, with its civil engineering arm recently securing contracts with Network Rail and BAE Systems worth over £23m.

Shares in the company closed down 55.9p, or 18 per cent, at 250.1p.