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M&E adds to Balfour profit woes as slow recovery sets in

Balfour Beatty took an extra £10m profit shortfall on top of the £50m warning it gave to the market in April 2013, it revealed today, due primarily to worsening conditions in M&E.

Balfour Beatty recorded pre-tax profits of £32m, down from £147m in 2012, a reduction of 78 per cent.

Underlying profit from continuing operations reduced to £21m from £119m in 2012, with the group putting the decline, in the main, down to the UK business.

It said: “Whilst we have seen a better than anticipated turnaround in the regional business, there was weaker financial performance on selected major projects in the building sector.

“In our mechanical and electrical engineering business, where we predominantly act as a subcontractor, financial performance in the final quarter was adversely impacted by increasingly difficult market conditions. The impact of these further deteriorations resulted in an overall £60m reduction in profitability versus expectations at the start of the year.”

It added: “The UK construction market has been a challenging environment in which to win and execute work, allowing clients to impose increasingly stringent conditions onto contractors, and as a result, placing subcontractors under significant financial pressure.”

However it saw an improved second half performance, having restructured and shifting the mix of work from the major projects business to regional construction due to the impact of the strengthening of the UK residential market and fewer major projects being brought to the market.

It has made several personnel changes in the last 18 months, including UK chief executive Nick Pollard’s first major restructure in November 2013.

Better for the future:

“In 2013 we faced challenging economic conditions in several markets and experienced operational issues in the UK construction business.  The remedial actions taken in underperforming areas are delivering results and have positioned us better for the future. Continuing to improve operational delivery and supply chain management will remain a particular area of focus throughout 2014.”

Group chief executive Andrew McNaughton

Analysts Liberum Capital called it a “reassuring update”.

It said: “We expect that 2013 will represent peak debt and trough earnings. The construction outlook is improving and that should drive earnings growth (2014 margin construction margin estimate of 1.0 per cent) and balance sheet repair. Some helpful contract news and the order book is now stable at £13.4bn (£13.5bn) excluding discontinueds.”

It added that PFI assets (£766m) had outperformed its estimate of £700m; likewise net debt (£310m) was better than Liberum’s £350m estimate.

Its total group assets are £5.8bn and total liabilities are £4.8bn. The group has reduced the amount it owes through trade and other receivables to £1.19bn from £1.24bn.

Restructuring costs of £32m were incurred (2012: £62m) relating to: Construction Services UK £14m (2012: £34m); Support Services UK £5m (2012: £5m); other UK entities £7m (2012: £10m).

Discussions with potential buyers for its German rail business are continuing, as the group wraps up its exit from European mainland rail services.

Its board has recommended a final dividend of 8.5p in respect of 2013. This is in line with 2012’s final dividend and results in an unchanged full-year dividend of 14.1pence.

Including the impact of exchange, negative working capital decreased from £665m at the end of 2012 to £550m at the end of 2013. Of this decrease of £115m, the biggest component was £75m in Construction Services.

It said this was largely due to changes in the mix of business, away from larger more complex projects, which have the potential for more favourable terms, to smaller projects.

It expects to receive a £10m settlement in a longstanding contract dispute in Professional Services in 2014.

Construction Services:

Revenue for the year was £6.57bn, up marginally on last year. Its order book was £7.72bn, operating profit was £21m (2012: £119m) and margin was 0.3 per cent (2012: 1.8 per cent).

Support services:

Revenue for the year was up 10 per cent at £1.26bn as a result of strong performance in the power sector – up 18 per cent on 2012 with an underlying operating margin of 4.3 per cent compared with 2.6 per cent in 2012.

The group is targeting water, but expects volumes in the power transmission sector are likely to reduce as current contracts complete with an expected £100m hit to revenue.

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