Profit warning leaves Balfour Beatty vulnerable

Balfour Beatty's construction arm has been toiling and faces a struggle to restore consistency in operational delivery. Picture: PA
Balfour Beatty's construction arm has been toiling and faces a struggle to restore consistency in operational delivery. Picture: PA
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A THIRD profit warning of the year from Balfour Beatty claimed the scalp of its chairman yesterday and re-ignited speculation that suitor Carillion could return with a tougher offer.

Former Railtrack boss Steve Marshall, who has been running Balfour since the departure of chief executive Andrew McNaughton in May, offered his resignation as he highlighted a further £75 million shortfall in its UK construction arm.

The division, which was the subject of a £35m downgrade in July, has seen its engineering services impacted by design changes, project delays, rework on projects and contractual disputes.

Marshall described the latest trading statement as “extremely disappointing” and said he planned to step down from the board once a new chief executive has been appointed and his own replacement is identified.

He said: “There has been inconsistent operational delivery across some parts of the UK construction business and that is unacceptable. Restoring consistency will take time and it has our full focus.”

The company has hired accountant KPMG to review the division after taking additional losses and write-downs across a number of contracts.

In the construction business, Balfour is being more selective in the work it bids for, resulting in a lower order intake, and the closure of some offices.

Apart from construction, the company said current trading and full-year expectations remain broadly in line with its forecasts.

It recently secured a deal worth £820m to sell US professional services firm Parsons Brinckerhoff to WSP Global – five years after it bought the business for £380m.

Up to £200m will be returned to shareholders following the disposal but Balfour warned that the final dividend for 2014 will be reviewed to establish a level appropriate for the group’s re-shaped portfolio of businesses.

The Parsons Brinckerhoff sale was a key stumbling block for talks over a merger with rival Carillion, with Marshall leading the fight against the 
£3 billion deal.

Stephen Williams, analyst at Brewin Dolphin, said the collapse of talks last month now looked to be more of a lucky escape than a missed opportunity for Carillion.

He added that the profit warning may constitute a “material event” that would allow the usual six-month cooling-off period following the rejection of an offer to be disregarded. “If Carillion were to come back to the table, this profit warning on the outlook for the UK construction operation would almost certainly mean a substantially lower offer price,” Williams said. “In addition, it may not feel it necessary to guarantee Balfour’s shareholders the previous attractive dividend.”

Meanwhile Garry White, chief investment commentator at Charles Stanley, said the share price reaction suggested the market expects more bad news to emerge from Balfour.

He said: “The new chairman and chief executive will have a number of challenges to face – and there may be further issues uncovered and a number of write-downs to come.

“Marshall said he expects to appoint a ‘seasoned’ new chief executive within weeks, not months. This is vital for shareholders not to lose faith.”