Balfour Beatty issues profit warning

Balfour Beatty has issued a profit warning as the ongoing downturn in the UK construction industry dragged down its performance in the third quarter.

In a statement to the City this morning, UK’s largest contractor said “difficult trading conditions” have persisted in both the UK and the US for the Group’s construction business, and “the performance of our UK construction business is weaker than anticipated”.

Balfour Beatty’s share price fell 16% on the news of the profit warning, tumbling from 306p at close yesterday (7 November) to 256p on early trading this morning.

The firm said: “As a result and based on the outturn for the third quarter, profitability in 2012 will be slightly lower than expected at the time of the half-year results although this will be somewhat offset by a slightly lower effective tax rate.”

The company added that the difficult market conditions had also led to a “significant decline” in the UK Construction Services order book in the third quarter.  This followed a small decrease in the first half of the year.

As a result the Group’s order book closed at £14.4bn at the end of September, down from £15bn at the end of June, the company said.

Above: Real-time Share Price

The profit warning comes after Building revealed the detail of the firm’s restructure of its UK construction business, which will see the industry behemoth slim down and reshape its business around four regional hubs. The restructure will contribute around £30m in cost savings, which forms the greater part of the £50m in annual savings the Group plans to deliver by 2015.

Balfour Beatty recently lost out to rivals in the race for some major jobs, including the £1.1bn Sellafield Infrastructure Strategic Alliance contract, as well as the £100m job to build a new Pier at Gatwick, won by Vinci.Earlier in the year the firm also lost out to a Laing O’Rourke-Bouygues joint venture in the race for the £2bn Hinkley nuclear civils job.

This morning Balfour Beatty said the UK construction business was seeing a “further market deterioration”, with the business continuing to target smaller contracts in a market with “very few major projects”.

The firm said around half its UK construction market was now in its regional business, up from a third a year ago. “At the same time, the supply chain is suffering which in turn, reduces our ability to negotiate terms that match the worsening market conditions,” the firm added.

“The adverse impact of these recent developments is expected to reduce profitability slightly this year,” Balfour Beatty said. “Looking ahead, there is reduced visibility due to smaller projects and shorter lead times, but in the absence of an immediate improvement in these emerging market conditions, we expect further decline in activity levels and pressure on margins into 2013.”

The firm added that its rail construction business also performed below expectations in the third quarter, with profits down around £10m, as “critically low” activity levels in Italy and Spain dragged down the figures. The firm said it was now undertaking a review of the operations across its European rail business.

In the US construction business, Balfour Beatty said positive leading indicators seen in the five months to March 2012 had reversed, with the five subsequent months showing negative indicators, “pushing market recovery further out than initially envisaged and keeping market volumes at a depressed but stable level”.

The firm said: “Overall, our US construction business has performed in line with our expectations, although the order book has decreased.”