Balfour Beatty plc Dives 20% On Third Profit Warning

Balfour BeattyShares in troubled construction firm Balfour Beatty (LSE: BBY) fell by more than 20% to around 175p when markets opened this morning, thanks to the group’s third profit warning this year.

What’s happened now?

Unsurprisingly, the culprit is Balfour’s UK construction division. Full-year profits are now expected to be a further £75m lower than expected, thanks to more problems with existing contracts.

Balfour has appointed accountants KPMG to conduct a detailed review of all its UK construction contracts, which is expected to complete by the end of the year.

No cash return

The firm also slipped out two more items of bad news this morning. Firstly, the £200m shareholder return promised from the Parsons Brinckerhoff sale will be in the form of a share buyback. There will be no cash return.

Second, Balfour confirmed that the final dividend is likely to be cut, to ensure it remains sustainable, given the loss of future earnings from the Parsons business.

Profit and dividend outlook

Before today’s update, Balfour was forecasting pre-tax profits of between £145m and £160m for this year, which suggests that 2014 profits are now likely to be around £70m-£85m, excluding the proceeds of the Parsons Brinckerhoff sale.

Assuming the firm’s underlying tax rate is similar to last year, my calculations suggest earnings per share of around 9.3p for 2014, significantly down on analysts’ previous consensus forecast of 15.8p.

As for Balfour’s dividend, it has been clear for some time, in my view, that last year’s 14.1p dividend was unsustainable. I reckon shareholders should brace themselves for a cut of 40-50% to this year’s total payout.

What’s Balfour worth?

Balfour Beatty’s interim results indicate that the company’s book value is 140p per share.

This may rise slightly when the firm publishes the promised valuation update for its public-private partnership (PPP) property portfolio — so today’s 175p share price could be a realistic book price for the firm.

What’s more, although Balfour has clearly made a mess of its current UK construction contracts, the firm still has a strong presence in the UK infrastructure sector.

I don’t see any reason why this business cannot be turned around — although the firm’s chairman, Steve Marshall, warned this morning that this could take two or three years.

Buy Balfour?

I’ve added Balfour to my watch list.

The sale of Parsons Brinckerhoff should eliminate most of Balfour’s net debt, and at today’s price, I think Balfour might represent an attractive medium-term recovery play.

Of course, investing in turnaround situations is always risky, and you may not agree with my view on Balfour's troubled valuation.

In either case, I'd recommend a look at "Where We Think The Smart Money Is Headed" before you make a buy (or sell) decision on Balfour Beatty.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.