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City Site - Provisions focus minds at majors

FINANCE

THE CITY reacted in sharply different ways to the hefty provisions and reorganisations unveiled at Amec and Costain over the past week or so.

The £90 million of new provisions and costs had largely been expected at Amec and the upbeat performance by new chief executive Samir Brikho as he unveiled plans to launch a severe cost-cutting exercise and sell the group's constructionrelated businesses left the group's shares slightly higher.

By contrast, the catalogue of woes included in Costain's end of year trading update did not go down so well. It wiped a quarter off the group's stock market value and dented its image as one of the sector's brighter prospects, with attractive niches such as nuclear. The £50 million of provisions and cost over-runs came only months after the firm wrote off £30 million with its interim results in August.

Rather than forging any particular market leadership, the group's 'Being Number One' strategy seems so far to have been a mechanism for identifying contract losses.

Presumably, bid speculation should provide a floor to the shares from now on.

The news from Amec and Costain reinforces the case for major contractors maintaining a sharp focus on a limited number of related markets. The picture emerging at Amec is of a complicated group with a bloated cost base involved in a diversity of markets and with many businesses ripe for disposal. Yet the group's new strategy to focus on engineering and consultancy to various energy and industrial sectors will be easily judged against the ambitious targets for margins which Mr Brikho has set himself.

Costain is also aspiring to a more sharply focused future with an emphasis on its civil engineering roots, although doubters might wonder where the synergies lie between this and property development in southern Spain. A key milestone for the group will be to resume dividend payments. Convincing the City there are no more provisions to come would also help.