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Balfour Cuts Profit Forecast on U.K. Construction Woes

Balfour Beatty Plc, the U.K.’s largest construction company, said operating profit will be 50 million pounds ($78 million) less than predicted this year amid sluggish demand in its home market.

Chief Executive Officer Andrew McNaughton has taken charge of U.K. construction operations and is implementing a substantial revamp to cut costs, the London-based company said in a statement. The stock declined as much as 12 percent, the biggest drop since November.

Balfour Beatty faces declining profit margins amid a lack of building work in Britain. While the U.S., German and Canadian economies are back above their pre-recession levels, U.K. gross domestic product remains 2.6 percent below its peak in the first quarter of 2008. It means Britain remains mired in its longest peacetime slump since at least 1920, according to the National Institute of Economic and Social Research.

“The fall in earnings will be compounded by worries about the balance sheet and dividend,” said London-based Liberum Capital analyst Joe Brent. “The regional construction demand is clearly weak and the supply chain is under pressure.”

The stock declined as much as 28.60 pence to 217.80 pence and was down 8.9 percent as of 8:21 a.m., valuing the company at 1.5 billion pounds. Before today, the company had declined 10 percent this year, underperforming the 2.9 percent gain of the Bloomberg EMEA Engineering & Construction Index.

Declining Margins

The company in November forecast that profitability will drop “slightly” as it hasn’t been able to negotiate lower prices with suppliers to reflect market conditions.

Senior ministers in U.K. Prime Minister David Cameron’s government voiced caution about the country’s economy even after official data last week showed Britain avoided a triple-dip recession with stronger-than-expected growth in the first quarter.

“Change in procurement trends, which we have previously highlighted, have persisted, allowing customers to impose increasingly stringent conditions onto contractors,” Balfour Beatty said today. “In these extremely tough conditions, our U.K. construction business has been concurrently implementing a substantial organizational restructuring in order to streamline the business.”

Operations outside Britain are broadly in line with expectations, with improvements in the U.S., Asia and Middle East offsetting a 10 million-pound profit decline from rail operations in Germany and “weakness” in professional services in Australia, Balfour Beatty said.

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