Jarvis shares dive 75% on profit warning

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Jarvis, the engineering firm that teetered on the brink of financial collapse two years ago, has unveiled a profit warning that has wiped 75 per cent off its share price.

Under its existing management team, led by the former London mayoral candidate Stephen Norris, Jarvis has worked hard to restructure its business after the massive debt-for-equity swap that saved the company in 2005. Jarvis has washed its hands of its disastrous move into the Private Finance Initiative market after disposing of a number of contracts in areas like facilities management and student accommodation over the past year and the company is now almost entirely focused on railway maintenance work.

However, yesterday's warning that its second-half profits would be well below what had previously been anticipated shocked the market, coming less than two months after a positive trading update. Shares in Jarvis, which have steadily risen this year, crashed 75 per cent to 20p, valuing the company at around £40m, a fraction of its £800m valuation earlier this decade.

The warning came as a result of problems across the business with combined profit shortfalls equating to £8m expected in the second half of the year.

Geoff Allum, a broker with KBC Peel Hunt, cut his profit forecast for the year to £6m, against the £14.5m he had previously pencilled in, and sliced £6m off his profit forecast for 2009.

Jarvis said that, while there has been a pick-up in rail work over the year, the type of work that it is winning is lower-margin than it had previously expected, with overhead-line work dominating as opposed to the more lucrative contracts for replacing tracks.

As well as replacing tracks, Jarvis also builds the machinery to do the work, lending out equipment to its rival contractors. However, a contract with Network Rail for track mach-ines has underperformed as the Government-owned body has been using the machines at off-peak times when it can pay lower rates. Jarvis also reported problems at its transport division, with one of its core customers deciding to buy white vans directly rather than sourcing them from the engineering company.

Jarvis maintained that the prospects for its rail renewal business are "extremely good" and dismissed concerns that it could be in danger of breaching its banking covenants. It described problems at its rail business as "disappointing" but said that, after a solid first half, it had made "considerable progress toward the recovery of the group".