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Balfour Beatty considers social housing pull-out

Exclusive: Balfour Beatty is considering whether to pull out of several business activities following a profit warning this week that saw its share price plummet by over 15 per cent by mid afternoon.

Deputy chief executive Andrew McNaughton told CN that the firm is reviewing whether social housing is a “good space to be” as it “continually restructures” in line with the markets.

Actions taken so far under Balfour Beatty’s efficiency drive “are exactly the right things we should be doing”, he said. “Will it mean anything further? There may be some things in the business lines we might not want to do in the future.”

“There may be some things in the business lines we might not want to do in the future”

A fall in European rail work led to chief executive Ian Tyler telling analysts this morning that the company is “having to look at desisting from certain areas of the market”.

The company expects to suffer a £10m profit hit in 2012 due to lower rail construction activity in Italy and Spain.

Mr McNaughton said “all the options are on the table” as the company undertakes a strategic review of activities in its European rail divisions, but said the firm had “not concluded what the outcome will be”.

The £9.5bn turnover business predicted a “difficult year” for construction in 2013 in its two major markets – the UK and the US – when it reported that 2012 profits will be lower than forecast.

In the UK it cited a lack of major projects, an increase in smaller projects and the risks of a stressed supply chain.

Almost a third of Balfour Beatty’s UK construction work is now smaller projects, which Mr McNaughton said has always been part of the portfolio.

“The challenge is not with dealing with the delivery of them,” he said.

“First of all it’s the competitiveness of securing those, because everybody is swimming in the same pool at the moment.

“What we have to be very careful of is the stability of the supply chain.”

“Everybody is swimming in the same pool at the moment”

As CN revealed last week, Balfour Beatty is merging its supply chain lists as part of its restructure, which will bring the number of suppliers down from 15,000 to 10,000.

Mr McNaughton said he is not expecting to see a further pressure on the Balfour Beatty construction margin as there is “only so far it can go”. 

He said the group is in the “right places to be for the medium term” after setting out its UK construction restructure in recent weeks.

“We have already made the statement about rationalisation of fit-out for instance,” he added.

“There are a couple of questions over one or two areas - in terms of ‘is social housing a good space to be or not’.”

“There are a couple of questions over one or two areas - in terms of ‘is social housing a good space to be or not’”

Mansell Partnership Housing - part of the Mansell regional construction brand - has a £175 million turnover and offers new build, refurbishment, regeneration and extra care solutions.

Mr McNaughton said Balfour Beatty is always reviewing its markets, but ruled out following Carillion’s example of targeting a reduction in UK construction revenue.

He pointed out that construction represents a third of the group, with the UK providing 15 per cent of revenue, adding that 70 per cent of the business is “operating exactly as we expected”.

Asked whether he sees more big firms taking on smaller jobs and pushing out regional players, leading to consolidation in the market, he said: “Does it push out others? I think we are seeing some natural consolidation going on.

“In time, will it cause some radical change? I don’t think so.”

Mr McNaughton highlighted Balfour Beatty’s commitment to a government drive for invoice factoring, which enables suppliers to be paid sooner.

“Strong, stable, long-term relationships with those [suppliers] really is the issue – particularly around smaller-scale projects,” he said.

Asked if construction is now at a ‘new normal’ or at the bottom of a cycle, Mr McNaughton suggested the industry is “bumping along the bottom” of the cycle.

But he said he does not see it dropping further as there is already an absence of large and complex infrastructure projects.

Mr McNaughton urged government “don’t stop now” over its longer-term infrastructure, but also called for action that will help boost work and jobs in the short term.

“The government gets it that infrastructure is important,” he said. “The conversations we have had with government are that we have got to deal with the short term.

“The conversations we have had with government are that we have got to deal with the short term”

“When the schools programme was closed off, that undoubtedly had an impact, and those kinds of schemes and local projects do an awful lot in driving employment.”

Mr McNaughton said the PFI review had ‘stopped’ the market and that his company “eagerly anticipates” the announcement on 5 December.

“We really hope they are going to come forward with something that gets that going again,” he said.

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