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UPDATE 2-Balfour slashes profit forecast again on construction woes
January 22, 2015 / 7:37 AM / 3 years ago

UPDATE 2-Balfour slashes profit forecast again on construction woes

* Downgrades profit by 70 mln stg on review of UK contracts

* Cancels 200 mln stg share buyback

* Puts dividend under review (Adds CEO comments, analyst reaction)

By Paul Sandle

LONDON, Jan 22 (Reuters) - British infrastructure group Balfour Beatty cut its 2014 profit forecast, cancelled a 200 million-pound share buyback and put its dividend under review on Thursday after a review by auditors uncovered weak controls and escalating costs in its construction contracts.

The further deterioration at Balfour’s troubled British construction unit, combined with a reassessment of contract values, will reduce 2014 profit by 70 million pounds ($106 million), the company said.

Leo Quinn, a turnaround specialist installed as chief executive this month, said he was not surprised by any of KPMG’s findings.

“The company had become too big too quickly, and had become overly complex,” he told reporters in a conference call.

“There has also been a loss of control, and that is something we will look to restore.”

He said “a conspiracy of optimism” had caused the group to chase volumes by bidding for contracts at wafer-thin margins which then unravelled when it could not deliver.

Shares in Balfour, which lost 26 percent of their value in 2014, were up 0.68 percent at 207 pence by 1100 GMT.

Analysts said they were not surprised by the downgrade, which comes on the back of a string of profit warnings in 2014.

Stephen Rawlinson at broker Whitman-Howard said the cancellation of the buyback was the right decision.

“The share price will no doubt take an early hit but we see that has been stated this morning as sensible and predictable,” he said.

“It puts the company back on a good track, if it stops taking bad risks and potentially brings forward the plans of predators to move soon.”

Analysts had expected the group to report pretax profit of 46.2 million pounds, according to Thomson Reuters data.

Rival Carillion attempted to take advantage of Balfour’s predicament last year by making three unsolicited bids, each of which was snubbed.

John Laing Infrastructure Fund also entered the fray last month with an 1 billion pound offer for Balfour’s public-private partnership portfolio, which was rejected as too low.

Quinn said the value of its infrastructure assets, which include schools and hospitals, had increased to 1.3 billion pounds, and the portfolio was an integral part of the business.

“There’s an extremely strong link between the construction business and the investments,” he said.

$1 = 0.6600 pounds Editing by Kate Holton and Vincent Baby

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