■ Second profit warning in six months
■ UK construction facing £50m hit
■ Two PFI disposals will raise funds
Balfour Beatty (BBY) recently issued its second profit warning in six months - highlighting once again the difficulties within the UK construction sector. Large construction projects have slowly dwindled, despite several attempts by the government to use infrastructure spending as a key element in generating economic growth. Consequently, Balfour Beatty has been obliged to chase smaller-scale projects and this is where it has come unstuck.
Indeed, competition has been fierce and it seems that management hasn't quite been up to the task - which is why group chief executive Andrew McNaughton has personally taken charge of the UK construction business to address the operational issues. Sorting out the mess is expected to trim £50m from group profits. However, the rest of the business, with its wide geographical bases and comprehensive range of services, is performing much as expected. Moreover, the dent in profits will be partially filled by the sale of two PFI assets - one being its 50 per cent interest in four PFI schools projects to its co-shareholder Innisfree, generating a gain on disposal of £24.4m. The group is also selling its stake in the Tameside Hospital PFI project for a gain of £9m.
Numis Securities says...
Add. The latest profit warning looks to be company specific and the onus is now on management to deliver on this problem. We take the view that this will happen, but the short-term outlook still remains difficult. Accordingly, we have downgraded 2013's forecast pre-tax profits by 25 per cent, and 2014's by 14 per cent, to £200m and £257.4m, respectively, with forecast EPS of 24p and 28.7p. However, management has pointed out that a majority of the problem contracts are of less than one year duration and it believes that UK construction will return to profitability next year, although our group profit estimates are based on a move back to break-even. Our price target is 250p.
Panmure Gordon says...
Buy. Balfour Beatty has moved swiftly this time to address issues on the UK construction side and, of the 26 operating companies, six require close attention. The latest update also suggested that the German Rail operation has seen a £10m profit deterioration, which helps to explain the decision already made to exit European rail operations. Accordingly, we have downgraded our pre-tax profit estimate for 2013 from £265m to £214m, giving EPS of 25p. However, this still leaves the ratio of enterprise value and cash profits broadly in line with its five-year historic average, while management has confirmed the importance of maintaining the dividend payout. The company remains a strong player in the global infrastructure market, and trades at a reasonable valuation - so we maintain a medium-term buy stance.
