Balfour Beatty slashes guidance, cancels buyback and reviews dividend after KPMG review

22nd Jan 2015 07:10

Infrastructure group Balfour Beatty has slashed its expectations for 2014 UK construction profits by a further £70m, cancelled a proposed share buyback and cast doubts over its future dividend after a review of the business by advisers KPMG.The much-anticipated review by advisers KPMG, put in place before chief executive Leo Quinn took the reins last October, has found discrepancies in the size of some contracts and some deterioration in the value of work due to project performance, although the £70m figure was not as bad as some predicted, with some City analysts having forecast an additional £200m loss.Management said in order to maintain a strong balance sheet, it had cancelled the proposed £200m share buyback and said the dividend policy would be reviewed in March.A trading update also revealed that, while there had been no net material change in underlying trading across the group as a whole, the year-end order book will be slightly lower than the third quarter's £11.7bn.Furthermore, the company added that its mechanical and engineering joint venture in the Middle East continued to operate in challenging markets, though counterbalancing this was strong performance from the highways maintenance business in support services.One positive was that the directors' value of the investments portfolio, which is intended to provide an indicator of the value of its public-private partnership (PPP) investment portfolio, was increased 24% to £1.3bn as at 31 December 2014 from its previous £1.05bn.Quinn said the report was "an important step in drawing a line under a period of uncertainty for our customers" as the group had become "too complex and too devolved for adequate line of sight and financial control"."Significant opportunity exists across the group to drive reduced costs, improved profits and strong cash generation to the full benefit of our shareholders."Quinn is launching a group-wide programme for transformation, with an initial phase to drive significant reduction in overhead costs and substantially improved cash flow generation.KPMG reviewed a sample of 127 projects across the UK construction business and found £20m difference between its own assessment and the reported contract positions, together with £50m relating to its assessment of contract forecasts and subsequent deterioration in project performance up to the end of December 2014.Broker Westhouse Securities said the update did "not strike us as being entirely conclusive" and suggested there would be more bad news to come.Although the further £70m of contract losses were identified by KPMG, the company's plan to further assess the overall level of contract risk provisions in the UK construction suggests "there may be a greater degree of 'kitchen sinking' to come"."One positive is there has been no material change outside UK Construction since the Q3 trading statement. However, we do not assume foreign construction is immune from cost over-runs and delays. "If there had only been a £70m hit and no more, analysts might have expected a positive reaction from the market, but "a big question mark has been raised over cash, a continual concern over the past couple of years".Despite the proceeds from the Parsons Brinckerhoff disposal, the cancellation of the buyback "indicates the group is firmly in cash preservation mode and we believe there is a risk of a cash raise at some point".The broker added: "Until further details emerge in March we continue to believe there are too many fundamental uncertainties to allow the equity to be valued with any confidence."