12th Aug 2015 10:40
LONDON (Alliance News) - Construction and support services company Balfour Beatty PLC on Wednesday scrapped its interim dividend as it posted a substantially wider pretax loss for the first half of 2015 thanks to writedowns of onerous contracts in its UK construction arm, though it said it is working its way through its legacy problems.
The FTSE 250-listed group said its pretax loss for the six months to the end of June was GBP150 million, sharply wider than the GBP58 million loss it posted a year earlier. As a result of the drop in profit, the company said it won't pay an interim dividend, having paid 5.6 pence per share a year earlier.
Balfour has experienced a difficult few years after its UK construction business ran into problems from winning contracts which proved to be risky and ultimately unprofitable. It initiated a review in September last year of its UK construction services business in an attempt to stem the tide of profit warnings which dragged its shares lower over the course of 2014.
The group said the profit shortfall was caused by the UK construction business and the loss-making contracts, though it said it expects more than 90% of these problem contracts to be at practical or financial completion by the end of 2016. It did warn, however, that there a few "very complex" projects on its books in the UK where the outcome is uncertain and which could have either very positive or very negative effects.
Balfour also said its Build to Last transformation programme - focused on strengthening its financial controls and transparency, on key employee and sub-contractor retention, on its bidding, contracting and risk review process for projects, and on employee safety - is progressing well. To the end of the half, the scheme has boosted Balfour's cash position, improved its cash flow and achieved GBP25 million of the targeted GBP100 million of annualised savings.
Brokerage Numis said Balfour has made tangible progress on its road to recovery, particularly with the improvements coming from the Build to Last programme. Howard Seymour, an analyst at Numis, said the interim losses from the company were bound to be large, based on its last warning given in July, but have not increased since then.
"Inevitably the headline numbers set out the consequences of the historic issues that are now being tackled. However the continuing confidence of our customers in Balfour Beatty's expertise, the positive response of our people to change, demonstrated by our excellent net cash performance, and the underlying strength of our balance sheet, supported by the investments portfolio, all reinforce my conviction that over the medium-term we can provide our customers, employees and shareholders with superior returns," said Leo Quinn, Balfour's chief executive.
Quinn, the former chief executive of defence services company QinetiQ Group PLC, was brought in by Balfour last year to lead the review of Balfour's business following the profit warnings and in the wake of the unexpected resignation of his predecessor, Andrew McNaughton, in May last year. He was then joined by Philip Aiken, who was hired to become chairman in February to replace Steve Marshall, and by Phil Harrison as finance director, completing a clean sweep of Balfour's leadership team.
Balfour shares were up 3.3% to 259.90 pence on Wednesday mid-morning, one of the best performers in the FTSE 250.
Revenue for Balfour declined in the half, down to GBP4.19 billion from GBP4.23 billion, though its order book remained broadly stable at GBP11.3 billion, compared to GBP11.4 billion at the end of December.
Construction services revenue in the half was flat and down 5% in constant currencies, with revenue declines in the UK and US offset by a surge in sales in Hong Kong. The construction order book was stable at GBP7.7 billion in the half, with a 13% fall in the UK offset by gains elsewhere, including a 3% rise in the US.
The UK construction business, the primary culprit for the widened interim loss for Balfour, was again hit as the company made provisions against deals in the division, primarily in its regional operations. Those contracts have suffered further delays and operational deterioration in the half, Balfour said. The regional business also was responsible for the 2% decline in revenue in the UK construction business, as it offset revenue growth in major projects.
The group said its order intake decline in UK construction, down 13%, was caused by higher bid thresholds and a decision to withdraw from certain types of work in London and the South East, though it expects a second half improvement as contracts at the preferred bidder stage enter its order book.
Balfour's US construction revenue fell 1% in the half, while profitability was dragged down by historical issues in the business. A number of multi-family housing unit projects, bid for primarily in 2012 and 2013 by a now-discontinued business unit of the company in the South East of the US, suffered subcontractor failures in the half, while two projects in the federal healthcare sector were hit by overruns and yet further subcontractor issues.
The group's international operations, focused on South East Asia and the Middle East and run through joint ventures, were a bright spot, however, with revenue in its Gammon venture in Hong Kong up by 37% courtesy of growth in major building projects, including the Tuen Mun Area 54 housing development and the third phase of the Hong Kong Science Park.
Commenting on the results, broker Liberum said it was disappointed that Balfour did not provide any clarity over potential writedowns which may come from problems in its Hong Kong business, saying it would have preferred to get some certainty with a small negative rather than the company saying the contracts are still at break-even.
Balfour said its Middle East order book also improved, with growth in its Dubai-based construction joint venture, though this business did take a hit from provisions booked on legacy contracts, primarily in the mechanical and electrical engineering businesses.
Rail revenue in the construction arm was sharply lower, as Balfour had expected following the sale of its 50% stake in the Signalling Solutions Ltd business to French engineer Alstom and a reduction of operations outside the UK. The division was hit in July, however, after Network Rail and the company agreed Balfour would not continue working on the North West electrification project beyond the second phase, after a review of the contract found the company was unlikely to deliver on schedule or on budget.
In its Support Services division, Balfour saw flat revenue but a drop in profit, as its margin in the division sunk to only 0.7% from 3.6% a year earlier. The group has changed the management structure of its support services arm, with managing directors across the divisions now reporting directly to Balfour's chief executive.
Power revenue grew in the support services arm in the half, with a stabilisation of its revenue from its gas distribution partnership with National Grid offset by lower revenues elsewhere, including from the Beauly Denny project in Scotland and lower volumes from other National Grid deals. Transportation revenue was stable, though profit in its contracts for Highways England took a hit from operational and commercial issues on its Wiltshire deal.
Water revenue was lower as work completed on the asset management plan 5 cycle and as new contracts mobilised at the start of the sixth regulatory cycle from April. The order book was boosted, however, by the GBP800 million, five-year deal Balfour won in February with Thames Water to help build and maintain the water company's pipe, pumping stations and water treatment plant network.
The other bright spot for Balfour was in its infrastructure investments division, which generated a pretax profit GBP114 million in the half, up from GBP88 million, on the back of disposal gains totalling GBP112 million.
Numis analyst Seymour cited the gain in the investment book and other actions the group has taken to position the company well to benefit from any upturn in its markets as reasons to remain relatively positive on the company, even as the many moving parts across the business still make it difficult to predict the outcome of its year with any certainty.
By Sam Unsted; [email protected]; @SamUAtAlliance
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