Balfour Beatty issues fresh £75m profit warning

The troubles at Balfour Beatty have intensified this morning as the firm announced a fresh £75m profit warning.

In a trading update Balfour Beatty said “internal reviews conducted in recent days” had identified a £75m profit shortfall in the UK construction business “due to additional losses and write-downs across a number of contracts”.

It is the fifth profit warning issued by the firm in less than two years and by far the largest. Balfour Beatty’s share price fell 20% on early trading this morning following the announcement.

The firm said the profit shortfall was split across the UK construction business, with £30m within the M&E business; £20m within large London area building projects; £15m within the regional construction business; and £10m within major infrastructure projects.

The firm said it had appointed KPMG to conduct a detailed independent review of the contract portfolio within the UK construction business.

The profit warning comes as Building reveals this morning that Mark Cutler, the boss of the firm’s UK regional construction business has left the firm after just eight months. The firm also said this morning that executive chairman Steve Marshall would step down from the board following the appointment of a new chief executive.

It follows a series of profit warnings at the firm and the collapse of merger talks with Carillion over the summer.

Balfour Beatty said the KPMG review would focus on “commercial controls, on ‘cost to complete’ and contract value forecasting and reporting at project level”.

The firm said KPMG would report back “by the end of the year”.

The firm said that in the M&E business the £30m write-down related “mainly to previously highlighted problem contracts in London”.

“We have continued to experience programme slippage, resource and skills shortages, poor operational delivery and cost inflation pressures,” the firm said.

But it said the total number of the total number of problem contracts had increased from 21 to 25, of which 19 are due to reach operational completion in 2014.

Balfour Beatty issued a £30m profit warning in May - of which around £20m was focused on the M&E business - and a further £35m profit warning in July - all of which related to problems with the M&E business - and said it planned to reduce the £260m-turnover business by around a quarter by tightening its bidding criteria and stepping back from the London market. Today the firm said it was also withdrawing from bidding M&E work in the South-west.

The firm said the large London building projects, which have been transferred into the regional construction business, “have experienced further programme slippage and increases in cost to complete estimates”.

“The new management team are working hard to resolve these issues, whilst recognising increased risk,” the firm said.

Within the regional construction business, Balfour Beatty said it had experienced “continued difficulties in the South West and Wales regions”.

“These were previously highlighted as risks and we continue to take steps to reduce our exposure in these regions, where we are in consultation with our employees in regards to office closures.”

 It said that in its major infrastructure projects division the firm had “experienced cost forecast revisions on a small number of projects where we have experienced a change of scope, but where the commercial resolution is yet to be concluded”.

Balfour Beatty said that its search for a new group chief executive, following the departure of Andrew McNaughton in May, was now at an “advanced stage”, with an announcement to be made in due course.

The firm also said group chairman Steve Marshall, who has been acting as executive chairman until the firm appoints a new chief, will step down from the business following the appointment of a new chief executive and a new non-executive chairman.

Steve Marshall, Balfour Beatty executive chairman, said the latest latest trading update was “extremely disappointing”.

“There has been inconsistent operational delivery across some parts of the UK construction business and that is unacceptable,” he said.

“Restoring consistency will take time and it has our full focus. The board is committed to delivering shareholder value and we are progressing against the priorities we set out over the last few months, including the sale of Parsons Brinckerhoff and the announcement shortly of a new CEO.

“The Group’s other operating divisions are trading as expected and the board continues to believe the standalone strategy will deliver value in the medium term.”