BALFOUR BEATTY PLC 
LONDON (Reuters) - Shares in Balfour Beatty (>> Balfour Beatty plc) plunged on Monday after the British construction firm cut its profit forecast for the third time in less than five months, blaming increased losses on the mismanagement of a number of UK contracts.
Balfour, which rejected the merger advances of UK rival Carillion (>> Carillion plc) for the third time last month, said profits at its UK Construction Services unit would be 75 million pounds less than expected after taking writedowns on engineering contracts in London and hitting a number of costly setbacks on building and infrastructure projects.
Many of the problem contracts relate to work undertaken during the recession at wafer thin margins, as Balfour chased volumes, which have since failed to meet savings targets or budget forecasts as they approach completion.
In future the company has said it will now bid more selectively, focusing on higher returns as the construction market recovers, and reducing its exposure to harder to serve regions in southwest England and Wales.
Reacting to the latest warning, shares in the firm fell as much as 25 percent in early trading, their biggest ever single one-day drop.
By 1227 GMT (1.27 p.m. BST) the shares were trading down 18 percent at 184 pence, reducing its market value by over 300 million pounds to 1.2 billion pounds ($2 billion) -- almost a billion pounds less than the 2.1 billion Carillion's all-share merger offer valued Balfour at in August.
The group has now issued five profit warnings in two years, with the share price down over 40 percent in that time.
Its last chief executive, Andrew McNaughton, quit in May after the first of the profit warnings this year, which was followed by a second in July, and has yet to be replaced.
"This latest trading statement is extremely disappointing," Executive Chairman Steve Marshall said in a statement on Monday.
"There has been inconsistent operational delivery across some parts of the UK construction business and that is unacceptable."
Work within the construction arm had suffered from persistent skill shortages, particularly in the south west of England, as well as programme slippages, cost inflation and poor operational delivery, the company said.
As a result Marshall said the board has appointed auditing firm KPMG "to undertake a thorough review across the contract portfolio within Construction Services UK."
The review will focus on commercial controls, on costs incurred, the forecasting of contract values and reporting at project level, the group said, and a report is due to be completed by the end of the year.
Balfour also announced that following the $1.35 billion sale of its U.S. engineering and design consultancy unit Parsons Brinckerhoff to WSP Global (>> WSP Global Inc), which was announced earlier this month, the 2014 final dividend and future dividend cover would be reviewed in light of the group's changing shape.
In addition, the appointment of a new CEO was moving closer, the firm said, although Marshall announced that he would step down from the board following the handover to a new CEO and the identification of a new non-executive chairman.
FORECASTS SLASHED
"No one will be surprised by the estimate reduction. The scale is larger than we would have thought," analysts at Liberum said, slashing its 2014 pretax profit forecast from 75 million pounds to zero, and pencilling in a fall in the final dividend from 8.5p to 5.6p.
"We hope that we are now finding our way towards the bottom. The risk is that the KPMG review identifies further problems."
According to Reuters data, Balfour, which operates construction, engineering and facilities management services in over 80 countries, was on average expected to post a full-year pretax profit of 133 million pounds prior to Monday's statement.
That was already less than half what it posted two years ago.
With a turnaround strategy centred on the sale of Parsons Brinckerhoff, whose proceeds will be used in part to pay down net debt of around 500 million pounds, Balfour is trying to refocus itself as an Anglo-American construction and specialist services group.
The firm reiterated it was confident that its standalone approach would deliver value in the medium term for shareholders, and added that trading across the rest of the company and full-year expectations remained in line with its forecasts.
Disposal proceeds from already identified public-private partnership investments were ahead of revised expectations, due to favourable market conditions, the firm said, while its US construction order book continued to grow.
(Editing by Kate Holton and Greg Mahlich)
By Neil Maidment
