A profit warning from one of the UK's largest construction companies and a bellwether for the sector shocked the markets this week, sending shares in Balfour Beatty (BBY) 15 per cent lower, and shedding light on the dire conditions for the nations' builders. The profit warning came on the same day as MPs on the Public Accounts Committee (PAC) questioned whether the government's £310bn infrastructure spending plans are "credible".
UK construction has now been in decline for more than two years according to the March reading of 47.2 for the Markit/ CIPS UK Construction Purchasing Managers Index; a score below 50 means the sector is still contracting. The latest data revealed that civil engineering output is declining at its fastest rate since October 2009. It was hoped the National Infrastructure Plan, launched as long ago as late 2010, would bring more work but with the Treasury expecting that £200bn of the total would come from the private sector, the PAC has now urged the government to be "realistic" on that figure.
Balfour Beatty said that following a review of 65 per cent of its contracts by value, six out of 21 regional operating businesses in the UK are underperforming, with the majority of problems arising in contracts worth less than £1m. Balfour says its UK construction business is now only operating at break-even. Joe Brent, an analyst at Liberum Capital, says that while management have started to address the problem a quick fix is unlikely, and warned in a previous research note on the wider sector that there was anecdotal evidence of some "suicide bidding". Liberum forecasts a cut in Balfour's full-year dividend from 14.1p to 10p for 2013.
The profit warning only adds to a number of dismal trading statements from the construction sector after Morgan Sindall (MGNS) warned on profits and slashed its dividend, and structural steel specialist Severfield-Rowen (SFR) has seen its shares collapse by over 61 per cent to 40p this year as it grapples with loss-making contracts. Andy Brown, analyst at Panmure Gordon, said one recurring problem is that when contracts are won the margins are extremely tight due to the highly competitive environment.
