What's new
■ More losses revealed at the UK construction arm
■ £200m share buyback scheme cancelled
■ Dividend cut almost certain
Balfour Beatty (BBY) made it a double hat-trick of profit warnings in a little over two years with an update revealing yet another hole in its finances. An independent review by KPMG showed a catalogue of mistakes in the beleaguered infrastructure group's UK construction business. These included insufficient control of contract performance, optimistic assumptions on cost and procurement savings, and tendering at very low margins.
As a result, 2014 UK construction profit will be trimmed by a further £70m. That prompted management to cancel a proposed £200m share buyback scheme. What's more, the dividend policy will be "reviewed" - which usually implies a cut - with the full-year results due on March 25.
Last year, Balfour sold its profitable US Parsons Brinckerhoff business for £753m in an attempt to shore up a stretched balance sheet. The sale was seen as one of the main stumbling blocks behind a failed £3bn approach last year by rival Carillion (CLLN).
On a brighter note, the development value of the investment portfolio has been increased from £1.05bn last June to £1.3bn - an estimate consistent with the findings of the KPMG review. And beyond UK construction trading remains in line, with an earlier third-quarter update that confirmed an order-book value of £11.7bn.
Numis Securities says...
Add. The increased valuation on investments looks realistic in our view, and we are raising our price target to 230p to take account of this. Inevitably, though, we are still downgrading our forecasts for 2014, treating Parsons Brinckerhoff as a discontinued operation and factoring in the £70m impact on the UK construction division. We now reckon this division will show a £67m pre-tax loss for 2014. However, for the group as a whole we are leaving our 2015 forecasts unchanged on the basis that it is not possible to quantify the impact of potential management actions on the UK construction side at this stage. For 2014, we expect pre-tax losses of £66.8m and a loss per share of 1.9p. We also expect the full-year dividend to be cut from 14.1p a share for 2013 to 6.5p.
Liberum says...
Buy. We do not expect the new chief executive to be in a position to announce medium-term targets with the preliminary results in March. However, we are buyers for the long-term recovery and bid potential. Our view that the business can achieve operating margins of 2 per cent is unchanged. On that basis, we believe the group's portfolio of public-private partnerships and its oft-forgotten pipeline are worth more than its current capitalisation. On the bid front, too, Carillion is free to come back with another offer in a month from now.
