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UPDATE: Balfour Beatty Warns On 2014 Profit; CEO McNaughton Steps Down

6th May 2014 12:03

LONDON (Alliance News) - Construction giant Balfour Beatty PLC Tuesday said its construction business has continued to struggle which will result in "significantly" lower group pretax profit for 2014 than previously expected and it is now considering selling its engineering and design business Parsons Brinckerhoff.

The infrastructure group also said Chief Executive Andrew McNaughton has stepped down with immediate effect, and non-executive Chairman Steve Marshall will take over as executive chairman until a successor has been appointed. Balfour said it will begin the recruitment process "shortly."

In the last four months, Balfour said it underwent a strategic review to explore ways to simplify its structure and create a more focused group. The review has led to the decision to assess options for the possible sale of its engineering and design business Parsons Brinckerhoff.

The company said Parsons Brinckerhoff has been a successful business since it was acquired in 2009, and as anticipated there has been growth in the market towards design and build and public private partnership contracts.

"However, having professional services and construction capabilities combined within one organisation has not delivered material competitive advantage for the group," the company said.

Therefore the company is examining "how best to realise the substantial value" of the Parsons Brinckerhoff business.

In a trading update for the period January 1 to May 5, Balfour said that although its Professional and Support Service businesses have traded in line with management expectations, it now expects a GBP30 million shortfall for its UK Construction business in 2014.

The UK Construction business underwent a reorganisation in 2012 and 2013. However, the firm said the changes are taking effect at a "slower pace" than anticipated.

As a result group pretax profit for 2014 is expected to be significantly lower than previous expectations, in the range of GBP145 million and GBP160 million.

The group has been struggling for some time, and in March it reported a sharp drop in profit for 2013, due to the reorganisation of its UK construction business and a significant downturn in the Australian natural resources sector.

The FTSE 250-listed company posted a pretax profit of GBP32 million for 2013 compared with GBP147 million a year earlier, even though group revenue rose to GBP8.74 billion from GBP8.66 billion.

At the time Balfour Beatty said the UK construction market has been a challenging environment in which to win and execute work, "allowing clients to impose increasingly stringent conditions onto contractors, and as a result, placing subcontractors under significant financial pressure."

The company on Tuesday said its Investment division has also struggled in 2014 with delays in reaching financial close on certain projects, resulting in slightly lower than anticipated profit for the business.

It said given these delays, and a continuing favourable secondary market for infrastructure assets, it is now targeting total public?private partnership profit disposal gains of GBP50 million in 2014. This is GBP10 million higher than previously anticipated.

On a positive note, the company said the Infrascture Investments division secured its first contract win in Canada. Earlier this year, the firm said it was appointed as the preferred bidder for the GBP196 million BC Children's & BC Women's Redevelopment Project by the Provincial Health Services Authority in British Columbia. The project reached financial close in April.

Balfour said there has been significant performance improvement in the regional construction business, but the Mechanical and Electrical engineering and major buildings projects businesses have both experienced significant operational issues.

The Mechanical and Engineering business, where Balfour acts mainly as a subcontractor struggled amid "extremely challenging trading conditions." It said profitability for the divisions has also been impacted by poor operational delivery and commercial issues.

Order intake for the M&E business has so far been low in 2014 and as a result "our performance expectations for this business in 2014 are significantly lower than previously anticipated," it said. Balfour said the M&E business relies on major infrastructure and complex buildings for growth, and consequently its outlook remains difficult.

Overall, in first quarter of 2014, Balfour said its group order book fell to GBP12.9 billion compared with GBP13.4 billion at the end of 2013.

Increases to the Professional Services order book have been more than offset by reductions in the Construction Services and the Support Services order books, the company said.

Financially, the firm said it continues to operate with "good balance sheet strength." Average net debt for the three months to the end of March was in line with expectations at GBP310 million. Balfour said its expectation for average net debt for the year has increased by GBP25 million to GBP375 million.

Numis Securities Ltd said the UK Construction business will remain an issue until management can demonstrate that the numbers "have bottomed" and that it can benefit from the wider construction recovery. It said the proposed sale of its subsidiary and the "shock" departure of McNaughton raises questions about its strategic direction going forward and as a result it has lowered its target price to 260 pence.

Following the disappointing update, brokerage Liberum Capital cut its earnings per share forecast for the firm by 20% for both this year and next. The brokerage now forecasts 2014 and 2015 earnings per share of 17.1 pence and 20.6 pence respectively.

Balfour Beatty shares quoted at 229.50 pence Tuesday afternoon, down 56.30 pence or 19.7%.

By Anthony Tshibangu; [email protected]; @AnthonyAllNews

Copyright 2014 Alliance News Limited. All Rights Reserved.


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