Shares in Balfour Beatty plummeted yesterday after the construction and infrastructure group warned of a £35 million black hole within its troubled construction arm.
A shortfall of up to £30 million had been flagged up during an unscheduled update in May that led to the departure of chief executive officer Andrew McNaughton.
But stock in the firm fell by as much as 12% in early trading as investors struggled to get to grips with financial returns from the firm’s mechanical and electrical engineering division that were even worse than expected.
The situation which Balfour blamed on a variety of issues including project design changes, delays and contractual disputes, and which has led to a review is the second time in little over a year in which returns from the UK construction arm have fallen below expectations.
Balfour yesterday said it expected the “deterioration” to be broadly offset by further targeted sales of its public private partnership assets.
“We are on a 12-18 month programme to restore our UK construction business to a firm footing,” the company said.
“Whilst the regional and major projects businesses, which comprise 90% of the UK construction business, are on track and continue to perform in line with our expectations, there has been further deterioration in the engineering services business.
“Earlier in the year we appointed new management to engineering services to strengthen management control and project reviews.
“This has improved transparency and introduced greater rigour and scrutiny of contract positions.
“As a consequence we have identified a further £35m shortfall within engineering services.”
Balfour said the rest of operations were trading in line with expectations and the group said it remains on track to post pre-tax profits of between £145m and £160m for 2014.
Chairman Steve Marshall, who appointed Mr McNaughton as CEO at the start of last year, is running Balfour on a day-to-day basis while a new chief executive is found.
The company which is considering the sale of US project manager Parsons Brinckerhoff, a business it bought for £380m in 2009 employs more than 40,000 people worldwide.
The firm remains a significant employer in Scotland and has historic links to Tayside and Fife, with co-founder George Balfour serving his apprenticeship at a workshop in Dundee’s Blackness Road, and one of the firm’s first contracts being the construction of a tramway in Dunfermline.
By close of play yesterday, shares in Balfour had recovered some of the ground lost in early trading with stock down 4.5% at 222.5p.