Balfour Beatty losses widen in first half

INFRASTRUCTURE and construction group has seen its half-year losses widen dramatically after counting the cost of legacy “problem” contracts in the UK.
Leo Quinn: At helm since the turn of the year and driving changeLeo Quinn: At helm since the turn of the year and driving change
Leo Quinn: At helm since the turn of the year and driving change

However, new chief executive Leo Quinn said efforts to turn the business around, which include a goal to trim £100 million off its cost base by the end of next year, gave him confidence in the future.

Investors had been braced for swathes of red ink after Balfour – which has issued a string of profit alerts – last month warned that an ongoing review of the business had identified “legacy issues” in the UK, US and Middle East.

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These troublesome contracts will result in an “additional shortfall” to 2015 pre-tax profits of £120m-£150m, Balfour said, with the UK accounting for about two-thirds of the total. Before the warning, City analysts had been expecting a pre-tax profit of about £77m for the full year.

For the six months to 26 June, Balfour posted a pre-tax loss of £150m, compared with £58m a year earlier, with underlying group revenues coming in broadly flat at £4 billion.

Underlying losses at its UK construction business, which built the aquatics centre for the London Olympics and is involved in the Beauly to Denny overhead line replacement project, widened to £145m, from £59m last year, after taking hits on a number of legacy schemes.

Quinn said: “Inevitably the headline numbers set out the consequences of the historic issues that are now being tackled.

“However, the continuing confidence of our customers in Balfour Beatty’s expertise, the positive response of our people to change, demonstrated by our excellent net cash performance, and the underlying strength of our balance sheet, supported by the investments portfolio, all reinforce my conviction that over the medium term we can provide our customers, employees and shareholders with superior returns.”

The group’s UK order book shrank by 13 per cent, with fresh workloads in Scotland also declining, but it said this was to be expected as work progressed on the Aberdeen bypass. Balfour is working with Carillion and Galliford Try’s Morrison division on the £550m western peripheral route, set for completion in winter 2017.

But the firm said new orders won by its power business in the first half demonstrated the “good medium-term opportunities” for the division, which in February won a £40.7m contract from Perth-based power company SSE. Under the deal, Balfour will design and construct overhead lines and towers between Dounreay, Spittal and Mybster in Caithness, with work due to complete by July 2018.

Analysts at RBC Capital Markets said they were “reassured” there had been no fresh profit warning. They have pencilled in a pre-tax loss of about £130m for the full year.

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“We believe that Balfour Beatty is through the worst,” the broker added.

Howard Seymour, an analyst at Numis Securities, said: “Balfour Beatty is moving on to the front foot as its major markets start to improve. The stock remains a special situation as a recovery stock, but we believe that these first steps are positive ones.”

Balfour scrapped its final dividend last year after falling to a £304m pre-tax loss from continuing operations. While the group will not be paying an interim dividend, it is planning to reinstate payouts “at an appropriate level” next year.

Quinn, who took the top job at Balfour at the start of the year, said: “Six months in, our ‘build to last’ transformation programme is gaining traction throughout the business. We have a new senior leadership team and an organisation realigned with key customer sectors. We are on course to meet our 24-month targets for £200m cash in and £100m cost out.”

Analysts at Liberum said Balfour has “one of the strongest balance sheets in the sector” and the group’s shares could rise “materially” if the market senses no more profit warnings are on the horizon.