Balfour Beatty profits slashed £70m

The infrastructure group faces losses as KPMG report trashes its UK construction business.

by Adam Gale
Last Updated: 09 Jul 2015

You remember when Balfour Beatty said in September that it had overestimated its expected profits by £75m? It’s done it again. Who said lightning doesn't strike twice?

The builders announced this morning that a KPMG report into its struggling UK construction business found it had overvalued reported revenues from contracts to August last year by £20m. Its contract forecasts and worsening performance between August and September resulted in a further £50m reduction.

Balfour Beatty commissioned the report after announcing a 53% first half profit plunge in August to £22m, with the UK construction business making a £69m loss. A month later, it announced it had overstepped the mark by £75m, which combined with today’s ‘readjustment’ makes it very likely that firm will announce full year losses in March.

KPMG looked at 127 projects, which accounted for 36% of Balfour Beatty’s year-to-date revenue. Its assessment will have come as no surprise to its battered board, or anyone who’s ever paid out twice the quoted price for their new patio. The builder had ‘poor contract administration’, ‘insufficient…understanding on actual versus reported contract performance’ and tendered ‘at very low margins with optimistic assumptions around cost’. The shock.

Balfour Beatty's problems ultimately stem from its bidding low to keep business during the recession, and then being unable to return a profit on those historic contracts. It's mainly an issue in the engineering services section of the business, as well as the London and south-west regions.

The firm had already announced it wanted to make its engineering services division smaller and more focussed, and today said it’s protecting its balance sheet by cancelling a £200m share buyback and reviewing the dividend (shareholders must love that). But how else specifically does it intend to tackle the issues raised by KPMG?

New boss Leo Quinn, the son of a builder and a former head of defence firm Qinetiq, clearly has some ideas. The initial phase would be to ‘drive significant reduction in overhead costs and substantially improved cash flow generation’, while adding standard reporting for improved transparency and linking performance related pay to targets.

In the process, of course, ‘engineering, project management and customer-facing resource will be actively preserved and strengthened’. So, making more money, cutting costs and not firing anyone. Great plan, Leo.

Despite a surfeit of optimism causing the problem in the first place, the plan doesn’t seem to be going down too badly. After falling 3.5% on the news, Balfour Beatty shares have recovered their value this morning, trading at 205.4p.


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