New £35m profit shortfall hits Balfour Beatty M&E division

Balfour Beatty will re-evaluate its Mechanical and Electrical (M&E) division, following the confirmation of another £35million profit shortfall at a trading update on Thursday, with the division set to be slimmed down in response.

The Group said it has seen “further worsening in the trading performance” of the M&E service since the Q1 interim management statement, but that the shortfall would be “broadly offset by further targeted PPP disposal gains in the second half of 2014.”

 Full-year PPP disposal profits will be broadly in line with those achieved in the full-year 2013.

It added that pre-tax profit expectations for 2014 remain unchanged since the Q1 IMS, in the range of £145 – £160 million, as the regional and major projects businesses, which comprise 90 percent of the UK construction business, remain on track.

The latest profit warning follows the £30m black hole in May, which ultimately led to the resignation of Chief Executive Officer Andrew McNaughton and the replacement on a temporary basis by UK Chief Executive Nick Pollard of Engineering Services MD Phil McGuire. Balfour has yet to appoint a permanent successor to McNaughton.

Network Rail’s Uma Shanker took control of the Engineering Services business in April as Chief Operating Officer.

Balfour said £30 million of the total originates from a small number of existing contracts, predominantly in the London area: £20 million from a further deterioration in the projects previously highlighted, and £10 million due to issues identified on other contracts.

Additional factors contributing to this further deterioration include design changes, project delays, rework on projects and contractual disputes on a number of projects.

Greater selectivity in a slow market coupled with rigour in estimating and tender margins resulted in a low order intake, a reduction in revenue expectations and therefore a £5 million reduction in forecast profit from new orders in 2014.