Chief executive says the firm should ‘focus on the knitting’ as KPMG review prompts fresh profit warning
Balfour Beatty chief executive Leo Quinn has said he is targeting turning around the troubled contractor within two years, after the firm issued a fresh £70m profit warning this morning.
Today’s profit warning is the firm’s sixth in two and a half years, the latest resulting from an independent review of the contractor’s UK construction business being carried out by KPMG.
Asked today how long it would take to turnaround Balfour, on a conference call with journalists, Quinn said: “I’d be disappointed if we are not at a point 24 months from now where we’re comfortable, fully operational and performing well.”
Quinn, who joined Balfour at the start of this month, said the firm should be more “focussed on the knitting”, after KPMG’s review uncovered more problem contracts in the firm’s UK construction business.
Quinn also raised the prospect of further downsizing of the contractor, acknowledging the firm would be a different shape and size under his leadership, adding he would seek to determine “the optimal size and risk portfolio [of the firm], and I’ll take a judgment over time.”
He added: “We have to cut our cloth to what is a low margin industry.”
Quinn emphasised he placed a high value on Balfour’s investment business, after the firm rejected a £1bn bid for it by John Laing Infrastructure Fund last month.
Balfour revised up the value of its investment portfolio to £1.3bn this morning, the second upward revision in value in five months.
Quinn said construction and investment were “the ying and yang of construction and we see that relationship moving forward.”
Asked if Balfour was putting out a possible ‘price tag’ out in the market for the investments division, Quinn said: “If we were hanging out a price tag we wouldn’t be saying how integral it is to our business”, but when pressed said “my job is to maximise value for shareholders.”
On problems in the UK construction business, Quinn said he believed “poor tendering and a conspiracy of optimisim got in the way of good judgement.”
He said: “It’s all fixable, it just takes time […] It’s wrong to say ‘how badly has that been mismanaged’, our attention was not focused on the knitting.”
He said he was “from the school of second chance” when it came to Balfour bosses who had made mistakes on contracts.
Quinn said the firm was aiming to achieve “industry margins” of around 3% in construction.
Quinn highlighted that the firm had “grown rapidly” in recent years and should now shift its focus from “the top line” to “cash flow and profitability”.
He added: “I’d love to see it restored to strength […] It’s a challenge and we’ll give it our best shot.”
In May 2014 Balfour Beatty UK construction chief executive Nick Pollard told Building it would take 12 to 18 months from that point to fix the problems in the business.
Analysts raised doubts as to whether Balfour’s bad news is behind them, after Balfour said this morning it may make a further assessment on contract risk when it posts its full-year results in March.
Balfour said it would “assess the overall level of contract risk provisions in the UK construction business in light of the operational issues identified [by KPMG] and will announce the outcome at the full year results in March.”
Cenkos analyst Kevin Cammack said: “Quinn has clearly left the door open for further big write-downs in March. So one of the big questions is, what’s the scale of the further provisioning that needs to be made? Is it half a percent of contract value? 1%? 2%?”
Balfour Beatty’s share price was trading over 3.5% up at around 213p a share mid-afternoon on Thursday.