Balfour Beatty’s half year 2014 results announcement confirms that “ongoing issues” in UK construction have led to a disappointing performance - underlying pre-tax profits fell by £25m during the period.
Operational issues in the Engineering Services parts of the UK construction business have resulted in a disappointing 2014 first-half performance for the Group as a whole.
At the end of the period the Group’s order book was £13.0 billion, while underlying half-year pre-tax profit declined 53% to £22 million (2013: £47 million). Group revenue fell to £4.17bn, compared to £4.31bn in 2013.
In construction services, the firm made a loss of £76m, a 38.2% increase on a loss of £55m in H1 2013. Balfour Beatty said the profit shortfall in UK construction, the vast majority of which impacted the first-half, had resulted in a significant loss for the division.
It also saw an overall 3.8% fall in its construction order book –down to £7.6bn in H12014 from £7.9bn in H12013.
The firm’s Support Services order book was down 4% in the period, with new wins in relation to the upcoming water sector AMP 6 investment programme being “more than offset”£ by anticipated reductions in the power business.
In Professional Services, although the division maintained profitability at £26m, the group’s order book fell from £1.6bn to £1.4bn, while revenue also fell £68m to £802m.
Average net debt during the period was higher than management expectations, predominantly due to the issues in UK construction, and higher than expected working capital in Professional Services and Support Services. The Group holds total assets worth £5.63bn (2013: £6.2bn) with total liabilities of £4.66bn (2013: £5bn).
Balfour Beatty is currently on a 12-18 month programme to restore its UK construction business to a firm footing. However, the firm said financial performance had been “significantly impacted” by continuing operational issues in the Engineering Services business, and to a lesser extent the UK major building projects business.
The UK order book declined by 11%, largely due to increased selectivity in bidding activity, and reduced order intake within the Engineering Services business. In Engineering Services, which represents less than 10% of UK construction revenues, the firm highlighted in March that the business had been impacted by adverse market conditions towards the end of 2013. Balfour Beatty said:
“These conditions have continued into 2014, and poor operational delivery issues on a number of contracts have caused the business to experience an extremely challenging six months.”
According to Balfour Beatty, a number of factors have contributed to the deterioration, including design changes, project delays, rework and contractual disputes on a number of projects. In addition, greater selectivity in a slow market coupled with better rigour in estimating and greater discipline on tender margins had resulted in a lower order intake, and consequently lower revenue and profitability.
Since May the firm has appointed new leaders to the Engineering Services business to strengthen management control ; the arrival of a new managing director in mid-August, will complete the changes. A review of the size and geographic footprint of the business with the aim of ensuring a smaller, more focussed business means that in central London, Engineering Services will only be working with Balfour Beatty Group companies, where it can influence design and add value for customers.
In the regional business (which represents over 60% of UK construction revenues), Balfour Beatty said the regional pipeline remained “extremely active” with improving market conditions. The firm has seen a steady increase in bid margins on new orders - since the start of 2013 the bid margins in the regional business have improved by 2.8% in absolute terms. However the increase was from a low base which would “take time to feed through into profitability.” The Group expects all regional delivery units (before indirect overheads) to be profitable by January 2015.
The Board said it was committed to restoring shareholder value which would be achieved by addressing a number of key priorities, including concluding the Parsons Brinckerhoff sales process and adopting “an optimal approach to restoring value from the UK construction business including progressively returning it back to peer group margins.” Selection and recruitment of “an outstanding CEO to drive the Group forward” is also a key priority – a process which is being actively progressed.
In an update on the sale of Parsons Brinckerhoff, Balfour Beatty said the sale was proceeding in line with expectations and is well advanced with “strong competitive interest being maintained.” Round three bids are expected very shortly.