Connaught battered by council cutbacks

Connaught shares plunged yesterday after the specialist in repairs to social housing warned that profits would be badly hit by public spending cuts.

The shock profits warning, which sneaked out at 4.05pm – just 25 minutes before the week's trading session closed – wiped around £150m from the value of the company, whose shares closed down 105p at 215p.

Connaught said cost-conscious local councils were increasingly putting off spending and that 31 contracts in its Social Housing division were being hit by deferrals. Revenues for the current financial year will be £80m lower than expected while earnings before interest and tax will be £13m lower. The company also warned that if the trend continues it expects revenues to fall by £120m and earnings to be £16m lower for the financial year starting in 2011.

Connaught's unscheduled trading update left its shares limping along at their lowest level since October 2006. The statement also badly affected the company's fellow social housing group Mears, which lost 21p to 249p.

The move is expected to be followed by a rush of analyst downgrades when trading re-opens on Monday morning. Andrew Nussey, an analyst at KBC Peel Hunt, said the broker expects to reduce its 2010 pre-tax profit forecast for the company from £55m to £40m. "Given that this has occurred suddenly, there has been no opportunity to reduce cost and the full gross margin impact (we estimate about £14m) will fall to the bottom line."

Connaught said it had identified the troubled contracts as it carried out a review in the wake of the emergency Budget on 22 June, which slashed spending in an effort to balance the books and cut Britain's yawning current account deficit. Connaught also has operations in landscaping, forestry and other support services.

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