Two mid-cap companies have seen their shares slide after negative updates, with Balfour Beatty falling by nearly 2% and Oxford Instruments losing more than a quarter of its value.
Balfour issued a string of profit warnings in 2014 leading to a change of top management, and it has now got the first one for 2015 out of the way early.
It said 2014 profits in its construction unit would be cut by another £70m after a review by KPMG found differences between the reported positions of a number of contracts and the actual situation. The problems relate mainly to its engineering services division, some major projects in London, and its south west regional business. New chief executive Leo Quinn said:
I was never in doubt that there was a great deal of work to be done to restore the group to strength. Balfour Beatty is a large organisation which had become too complex and too devolved for adequate line of sight and financial control. The key is that these issues can be put right and we now have clear action plans in hand.
Significant opportunity exists across the group to drive reduced costs, improve profits and strong cash generation to the full benefit of our shareholders.
Alastair Stewart at Westhouse Securities issued a sell note, saying:
Balfour Beatty has announced the summary of KPMG’s independent review of UK contracts and issued its year end trading statement, which does not strike us as being entirely conclusive. A further £70m of contract losses have been identified by KPMG but “the board will assess the overall level of contract risk provisions in the UK construction business in light of the operational issues identified and will announce the outcome at the full year results in March”.
This suggests to us there may be a greater degree of “kitchen sinking” to come. One positive is there has been no material change outside UK Construction since the third quarter trading statement. However, we do not assume foreign construction is immune from cost over-runs and delays.
If there had only been a £70m hit... we would have assumed the shares would go up today, since some in the market expected an additional £200m loss. But there is still a risk of further provisioning and the cash is an issue, so there could be very volatile trading today. Until further details emerge in March we continue to believe there are too many fundamental uncertainties to allow the equity to be valued with any confidence.
Balfour shares are currently down 3.3p or 1.6% at 202.3p.
Meanwhile Oxford Instruments has dropped 305p or 28% to 795p after the company warned full year profits would fall by nearly 26% due to weak trading in Russia and Japan.
The company, which makes systems and parts for scanners, said second half revenues would be below market expectations. It has been hit by Russian sanctions, saying:
We now assume that no sales can be made to Russia for the remainder of the year and we are also assuming no sales to Russia next year.
Michael Blogg at Investec said:
Today’s third quarter update points to full-year adjusted pretax profit 20% short of our below-consensus estimate (and 26% below for the second half of 2015), which is a further significant disappointment following very poor interims in November.
Oxford Instruments is a ‘growth stock’ becalmed by very unhelpful trading conditions and it risks being de-rated, due to the delayed resumption of growth, margins that are going backwards and substantial balance sheet leverage. Our estimates, valuation and recommendation are all under review.
