Balfour Beatty expects difficult year

Third quarter figures for its construction services division have led UK-based infrastructure group Balfour Beatty to admit that profitability for 2012 will be lower than previously expected, and it is predicting that 2013 will be “a difficult year”.

Revealing its interim management statement for the period June 30 to November 7, 2012, Balfour Beatty said that its professional services, support services and infrastructure investments businesses were “demonstrating resilience and strength in a challenging economic environment, performing well and in line with our expectations”.

However, it said that in construction services, difficult trading conditions had persisted in its two major markets over the period.

It said US construction markets remained depressed, and the performance of its UK construction business had been weaker than predicted. It also said that structural problems in European Rail markets had added to the challenges.

Balfour Beatty now forecasts that profitability in 2012 will be lower than expected at the time of the half-year results, but it added that this would be somewhat offset by a slightly lower effective tax rate.

Recent conditions have led to a decline in the order book, and the company said this pointed to 2013 being a difficult year for construction services.

A small decrease in the first half in the construction services order book has been followed by what it described as a “more significant decline” in the third quarter. Although it said its order intake in its other businesses was stable, the group order book closed at £14.4 billion (€18.1 billion) at the end of September, down from £15.0 billion (€18.8 billion) at the end of June.

Balfour Beatty’s professional services was said to have continued to perform well, benefiting from its geographical diversity and the less cyclical nature of its civil infrastructure work. It said the order book remained stable overall, with small reductions in the UK and US offset by increases in the rest of the world.

For construction services, the US construction market saw the positive leading indicators witnessed in the five months to March 2012 reversed, with the five subsequent months showing negative indicators. Balfour Beatty said this pushed market recovery further out than initially envisaged and kept market volumes at a depressed but stable level.

“In this environment, our institutional building business has suffered from weak federal demand and the general lack of larger complex projects where there is greater opportunity to differentiate ourselves,” said Balfour Beatty.

“In contrast, the prospects for our civil infrastructure business remain positive, with some large design-build and PPP (public-private partnership) projects being tendered into the market. Overall, our US construction business has performed in line with our expectations, although the order book has decreased.”

It said that in the UK, it was seeing further market deterioration. It explained that the business was continuing to migrate towards smaller contracts in a market with very few major projects. Approximately half of its order book is now in its regional business, which is up from a third a year ago.

Looking ahead

Looking ahead, it said there was reduced visibility as a result of smaller projects and shorter lead times, but in the absence of an immediate improvement in these emerging market conditions, it expected further decline in activity levels and pressure on margins into 2013.

“We have been managing our business on the basis that market conditions would be tough, and this has been an effective strategy,” said the company. “We will take further action, both operationally and strategically where necessary, to mitigate any adverse impacts on our business.”

It said that in the medium and long term, it was confident that its position in infrastructure markets, its focus and competitive advantage in the transportation, rail, power, water and mining verticals, and its initiatives to access growing markets such as Australia, Canada, Brazil and India, would stand it in good stead, as well as making the business more robust.