Balfour Beatty could be braced for fresh profit warning in the new year following KPMG’s review of its UK contracts, city analysts have warned.
The contractor could face a write-down of £60m or more when the independent report is delivered to the board in January, analysts have speculated.
Investec issued updated research on 5 December, in which it forecasted that the contractor would take a £60m profit hit as a direct result of the findings of the KPMG review, with a full-year 2014 pre-tax loss of £65.5m.
Investec’s Andrew Gibb told Construction News that “there may be worse to come” for the contractor, which has issued three profit warnings totalling £140m in 2014.
He said: “Scientifically it’s very hard to put a number on [but] it’s our view that fundamentally things are likely to have another leg down in terms of the numbers.
“A lot will depend on the associated write downs and provisions; it could be a very expensive process to draw a line under all of the issues.”
Other analysts told Construction News Balfour Beatty’s shortfall could be greater than £60m. They said while a further profit shortfall could occur, factors such as differing contract terms and client demands made it difficult assess the potential cost.
One analyst, who asked not to be named, said £60m “would be a very low number” and added that it would be “a very good thing if it was only £60m”.
Liberum’s Joe Brent said if Balfour Beatty’s share price would be likely to increase if the profit warning was only £60m.
“No one really knows what the contract write-down will be, but if it were £60m, I would expect the shares to go up. The goodwill intangibles will be much larger, but will not matter so much,” he said.
Numis Securities’ Howard Seymour said he was forecasting the firm’s UK construction business would make a loss of £126m in 2014, followed by a further £30m loss in 2015 due to the ongoing impact of delivering fixed price contracts while supply chain costs are increasing.
Balfour Beatty appointed KPMG to undertake a review of its UK contracts after issuing a £75m profit warning in September, its third in 2014.
The review is focused on commercial controls, ‘cost to complete’, and contract value forecasting and reporting at project level.
Mr Cammack said it was “utterly understandable” that there would be “a further loss taken for restructuring or re-provisioning” as a result of the review.
“KPMG are not going to be appointed to undertake an exercise of this nature and then turn around and say everything is hunky dory,” he said.
Mr Cammack said he expected KPMG to recommend to Balfour Beatty next month that it implement one IT system across the business, which he said would “entail a significant investment and a write-off of value on the existing systems”.
He said Balfour Beatty’s failure to fully integrate acquisitions, particularly in its regional businesses, had made it difficult to address bidding and supply chain issues.
Cenkos Securities analyst Kevin Cammack said KPMG would also recommend that Balfour Beatty take greater provisions against rising costs and overruns in existing contracts than they had done.
In an update to the City on 5 December, Balfour Beatty said the review was “well progressed” with the report to be delivered to the board in January and its conclusions to be announced in the second half of the month.
Analysts have hailed the appointment of incoming group CEO Leo Quinn, who joins next month from QinetiQ, as the right man to turn around the business. Since his appointment was announced, the group has sold Parsons Brinckerhoff to WSP Global for £820m.
Balfour Beatty last week rejected a move by John Laing Infrastructure Fund to snap up its PPP portfolio for £1bn (see box), which it said would be worth “substantially in excess” of its directors’ valuation of £1.05bn.
Mr Cammack said if Balfour Beatty had cashed in on the offer, it could have been “the signal that the group is weaker than we thought”.
He said: “If they had the remotest confidence in their August directors’ valuation of £1.05bn, why on earth would they be selling the asset at £1bn today?”
Mr Brent said the PPP assets alone could be worth up to £1.2bn, but that did not include the pipeline and the investments business, which also hold value.
Balfour Beatty declined to comment.
John Laing keeps eye on Balfour’s PPP portfolio
John Laing Infrastructure Fund has said it will “continue to evaluate options” for acquiring Balfour Beatty’s PPP portfolio after the contractor rejected its £1bn cash bid.
Balfour Beatty said the £1bn proposal from JLIF fell “significantly short” of its own view of the value of its PPP portfolio of £1.05bn at 28 June, following a revaluation in August.
JLIF said Balfour Beatty’s valuation of its portfolio was “overly optimistic”, adding that it would continue to evaluate its options for unlocking the portfolio.
It first made an offer in May 2014 with a proposal offering a £200m premium on the then-valuation of £766m.