Fresh profit warning rocks Balfour Beatty

associate Business editor

Shares in Balfour Beatty plunged yesterday as the construction giant issued its second profit warning in only two months, blamed mainly on problems with engineering contracts in London.

Balfour – whose profit warning in May cost chief executive Andrew McNaughton his job – announced a £35m hit to profits from its engineering services division, of which £30m "relates to a small number of existing contracts, predominantly in the London area".

Design changes, project delays, the reworking of some schemes and contractual disputes have all piled on the pressure. Investors were spooked, though, by news that around a third of the losses were on contracts where problems had not been previously discovered. The shares initially dropped by more than 17 per cent, before recovering slightly to 222.50p – still a fall of 10.50p, or 4.51 per cent.

Balfour's engineering services arm will be shrunk to focus on assignments that are safer financially. In London, it will only work with clients where it can have greater oversight of designs – in a bid to mitigate some of the more costly changes to projects that are often demanded by developers, architects and tenants.

The remaining £5m of the profit blow was down to reduced revenue, as Balfour moved to become more rigorous on vital aspects of its bids for work, such as estimating tender margins.

In a trading statement, the company which turned architect Zaha Hadid's dramatic vision for the Olympic aquatics centre into reality – said the losses would be offset by selling investments in public-private partnerships. Analysts at the broker Westhouse Securities said that this would "not impress investors and could feed the impression that Balfour Beatty is selling the family silver to pay for problems".

The group insisted that its 2014 pre-tax profit would still come in at between £145m and £160m.

The UK construction division is currently undergoing a 12 to 18-month revamp – a move that the executive chairman, Steve Marshall, hopes will put the historic core of Balfour back on a "firm footing".

However, net debt is currently "slightly higher" than forecast at £420m.

Mr McNaughton quit at the beginning of May after little more than a year in the job when Balfour said that profits for 2014 would be significantly lower than expected, prompting the shares to dive by a fifth. The company has now reported four profit warnings in two years.

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