Balfour Beatty's construction arm hit by sluggish UK market

Balfour Beatty’s construction arm was the only part of the business not to see a rise in profits last year, with the firm pointing to lower public spending and a highly competitive market eroding margins.

Balfour Beatty’s results for the year ended 31 December 2011 showed operating profit for its construction arm fell 16%compared to the previous year to £169m, with margins reduced from 3% to 2.4%.

The results also showed a fall in the firm’s order book for construction from £9.2bn in 2010 to £8.5bn last year. However, revenue across the firm’s construction arm was up 5% to £7.05bn.

The results came as the firm announced that Gammon Construction, in which Balfour owns a 50% shareholding, had been awarded a £507m contract at Hong Kong International airport.

The contract is for the construction of the new concourse in the central area of the airport, complete with 19 fully serviced aircraft stands, fixed link bridges and associated transport links.

Overall for the group, Balfour Beatty’s pre-tax profit rose 22% to £246m on the back of a strong performance from the professional and support services businesses. Revenue across the group was also up 5% to £11bn.

The firm said the performance of the construction arm was impacted by the “full-year effect of the reduction in public spending as well as low volumes in commercial property development in our major markets”.

It said “very good growth” in Hong Kong and the US was partly offset by a 1% decline in the UK, particularly in civil infrastructure.

In a statement, Balfour said, in the UK, the market was competitive and average project sizes were smaller relative to those in the recent past. It said that at the beginning of the year expectations had been “dampened” by the government’s public spending cuts.

“The volume of work has been lower - particularly in health and education. This has increased competition in the market, with a consequent adverse impact on margins. In these conditions, our diversity has been a particular strength - enabling us to shift resources into more promising sectors such as energy-from-waste, nuclear new-build and Crossrail.

“In this difficult environment, margins in UK construction held up reasonably well at 2010 levels. This performance was helped by the cost reduction initiatives we have been implementing in back office and procurement in parts of the UK business.”

The firm said it had achieved a record order book for the second year running in Hong Kong, and that there were signs of improvement in the Dubai market. It added that Abu Dhabi had grown less than expected, but the firm remained active, both in M&E and construction.

Balfour added: “Looking forward, with public sector spending likely to continue shrinking in many developed countries, we will look for growth in the regulated and private sectors - as well as economies where governments are spending on infrastructure to support their economic development.

“In the UK we are pursuing growth particularly in the power, rail and commercial sectors. We also see continuing opportunity in parts of the public sector, such as the new PFI priority schools programme.”