Today's Falling Knife: Balfour Beatty Drops 12%


LONDON -- Balfour Beatty shocked the market this morning after announcing that its construction business in the U.K. is expected to deliver far lower profits than previously expected, as the share price fell over 11.7% in early morning trade to 217 pence.

Market conditions in the U.K. deteriorated significantly in the second half of its fiscal year, and management highlighted a change in procurement trends, which allows "customers to impose increasingly stringent conditions onto contractors".

Elsewhere, the building part of the major projects business also underperformed, leading to an internal review, which concluded that "the combination of a difficult external environment and internal reorganization has resulted in specific instances of poor operational delivery".

The shortfall in profits is expected to be around £50 million. In order to try and reverse the decline in the U.K. operation's performance, Balfour Beatty CEO Andrew McNaughton is looking to reduce costs and implementing "substantial organizational restructuring" first-hand in order to streamline the business.

Management sought to reassure shareholders by stating that the balance sheet remains strong, and trading in other businesses is "broadly in line with expectations, with a £10 million profit deterioration in rail operations in Germany and some weakness in professional services in Australia offset by outperformance in investments and in professional services, specifically in U.S. transportation, Asia and the Middle East".

Only last month did Balfour Beatty raise its full-year dividend, which puts it on a consensus yield of around 5.7%. However, this announcement was reported alongside a 7% dip in profits, sending a warning sign to investors. If the company can turn its U.K. operations around, then there is an opportunity to be had, but for the time being it is likely that those interested in Balfour Beatty will remain so from afar...

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