Questor share tip: Balfour Beatty warns on profit

In particular the mechanical and electrical division has been a real problem child. This is the part of Balfour’s business that provides electrical engineers to complete the wiring on large newbuild high-rise tower blocks. Balfour operates as a subcontractor on these building projects and delivers the wiring and mechanics, or as chairman Steve Marshall calls it, “the guts of the building”.

When the company carried out a review of many of these contracts it was decided that they were no longer profitable.

The lower anticipated profits for this accounts for about two-thirds of the profit warning. The rest comes from a more negative outlook on the future and a declining order book.

Balfour generates 73pc of its revenue and about 40pc of operating profit from construction. The company has previously mentioned signs of improvement in the UK as it was hoped economic growth would slowly feed through to construction. Mr Marshall said: “The benefits are steadily coming through; they are just coming through more slowly.”

Underlying profit from construction slumped from £119m in 2012 to just £21m last year. Any hopes of a quick recovery have now been dashed.

The company, which operates in more than 80 countries, said its order book was also declining down to £12.9bn, from £13.4bn at the end of 2013. The fall in the order book was due to the delay of contract awards in the UK and a drop in work for water utility companies.

After adjusting for today’s profit warning analysts from Numis now expect full-year revenue of £10.4bn and pre-tax profits of £145m, giving earnings per share of 17.2p. Questor thinks that leaves the shares still looking a bit pricey trading on a price-earnings ratio of 13.7 times.

Balfour doesn’t expect the situation regarding big UK projects to improve markedly in the year ahead. The construction firm warned: “The number of new major infrastructure projects to be awarded in the short term is expected to be low.”

The US saw a steady improvement in its building sector last year. Balfour’s order intake in the country increased sharply throughout 2013, driven largely by the private sector as state budgets remain constrained.

In Hong Kong, construction was boosted by large-scale spending on transportation and public buildings. However, there have been delays in the awarding of rail work in Australia. When Questor last looked at the shares (Hold, 297.6p, March 7) Balfour was downgraded with a warning it would be a very difficult year for company. However, the attraction was the dividend yield of 5.2pc that meant investors could sit and wait for a recovery.

Mr Marshall believes that Balfour’s balance sheet is easily able to finance the continued payment of the 14.1p annual dividend. Questor thinks any recovery will now be a long time coming and retains a hold.

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