Balfour Beatty Hit by Steepest Share Price Loss in 14 Years
**Annual Profitability to Be “Slightly Lower Than Expected”**
Infrastructure services company Balfour Beatty PLC (LON:BBY) issued a profit warning on Thursday (8 November 2012), citing weak demand for new construction projects in its core British market. In a third quarter trading update the construction giant said: “In the UK, we are seeing further market deterioration. As a result and based on the outturn for the third quarter, profitability in 2012 will be slightly lower than expected at the time of the half-year results.”
During the July-September period, the lack of major projects and the movement towards smaller projects alongside a stressed supply chain reduced Balfour Beatty’s “ability to negotiate terms that match the worsening market conditions”. The group’s construction order book suffered a significant decline, falling to £14.4 billion on September 30 from £15 billion on June 30. Orders for professional services were more robust, with declines in the UK and US offset by growing demand in other parts of the world where the international company operates. Yet, due to lower rail construction activity in Italy and Spain in particular, combined with increasing commoditisation of work in Germany and the UK, Balfour Beatty expects “a further adverse impact on profits of around £10 million in 2012.” In the light of these structural factors, the firm said that it will review its European rail business operations.
**Pressure Expected to Continue into Next Year**
According to Balfour’s Q3 interim statement, the market conditions that have led to the recent decline in construction order books and the following profit warning are likely to persist into 2013, pointing to another difficult year for construction services. The company said: “Looking ahead, there is reduced visibility due to smaller projects and shorter lead times, but in the absence of an immediate improvement in these emerging market conditions, we expect further decline in activity levels and pressure on margins into 2013.”
**Cutting Costs to Prevent Further Declines**
!m[Balfour Beatty Issues Profit Warning and Expects Tough Market Conditions to Persist into 2013](/uploads/story/748/thumbs/pic1_inline.png)To offset the impact of falling order books and squeezed margins, Belfour Beatty has set a restructuring and cost saving plan. The scheme was announced in March this year and according to the company’s management, is already making progress.
The first stage of the plan targets savings of £30 million by the end of 2012, gained from “indirect procurement” and combining accounting and payroll into a single centre in Newcastle. The second phase aims at £50 million annual savings by 2015 and involves 650 job cuts and combining six operating companies into one by January 2013. Balfour’s management sees this new operating structure as “more flexible, agile and adaptable to change, should market conditions require.”
**Shares Plummet Most in 14 Years**
After announcing its revised outlook for full-year profit margins, Balfour Beatty’s shares showed their steepest loss in 14 years. The company’s decline was the worst amongst stocks on the FTSE All-Share Index early trading today, falling 15 per cent at 259.1 pence — its sharpest intraday tumble since October 1998.
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