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UK construction firms more sensible after Carillion collapse

Bengaluru, India

BRITISH construction firms are taking a more sensible approach to big projects, pursuing profitability rather than growth at any price, after paper-thin margins helped derail rival Carillion, the boss of contractor Balfour Beatty said on Wednesday.

Balfour posted a 69 per cent rise in first-half profit, benefiting from lower costs and higher margin projects, choosing contracts more carefully in Britain and Ireland, the US and the Far East as part of its long turnaround plan.

Balfour said that all its businesses are now either achieving industry standard margins or are on track to do so in the second half. It expects to meet its full-year earnings expectations.

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Shares in Balfour - which is working on projects that are part of High Speed Rail 2, a planned rail link between London and Birmingham, and the Hinkley Point C nuclear power station - rose nearly 4 per cent to 301.7 pence (S$5.28) on Wednesday.

"I think the industry has become much more measured and less fascinated with growth . . . The industry is far more sensible than it has ever been," chief executive officer Leo Quinn told Reuters.

He said that pricing and terms on contracts had become more sensible with one less competitor in the market place, Carillion.

Carillion collapsed in January when its banks pulled the plug, triggering Britain's biggest corporate failure in a decade.

Balfour Beatty said that it was taking measures to maintain its margins long term, as it faces growing uncertainty over Brexit and global trade tensions.

The company sees higher costs from trade wars flowing through to the supply chain and said that it would look to price some inflation into the contracts.

The US has put tariffs on steel and aluminium imports, and has imposed 25 per cent tariffs on some Chinese imports, drawing swift retaliation from Beijing.

While first-half margins at Balfour's US construction and support services units were in line with the company's margin forecast, margins at its British construction unit came in at 0.5 per cent, well below the 2-3 per cent that it was targeting.

However, Balfour said that underlying British construction margins were 2.1 per cent, excluding its Aberdeen Western Peripheral Route (AWPR) road project in Scotland, which suffered delays and cost increases.

Underlying profit from operations at its UK construction business rose to £5 million from £2 million, after a charge of £15 million for the AWPR project.

One of Carillion's joint venture partners on the AWPR, Balfour Beatty took a £23 million loss in the first half, on top of a £44 million charge in 2017.

Overall underlying operating profit rose 69 per cent to £66 million for the six months ended June 29. Revenue fell 8.5 per cent to £3.84 billion. The company forecast second-half revenue in line with the first. It also raised its interim dividend by 33 per cent to 1.6 pence per share.

Balfour's order book rose 10.5 per cent to £12.6 billion at the end of the first half, largely helped by US construction wins, including a 30 per cent share of a US$2 billion project at Los Angeles Airport. REUTERS