Higher costs impact on Invensys profits

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ENGINEER Invensys said full-year profit would be hit by higher costs for work on control and safety systems in nuclear reactors being built in China and in its rail signalling division, sending its stock diving to a 33-month low.

Invensys, which had been targeting an improved performance in its 2011/12 year, said yesterday operating profit for the year to end-March would now be significantly below last year’s £262m.

Chief executive Wayne Edmunds said overruns of £40m in nuclear and £20m in a handful of rail contracts were “disappointing”.

The first of three Chinese nuclear contracts, involving groundbreaking work at four nuclear reactors and worth about £162.98m, would now be unprofitable, he said.

“The other two contracts for the remaining four reactors will be profitable,” he said.

Invensys, whose products include controls for central heating systems and washing machines, competes with ABB, Honeywell and Siemens.

Analysts said the warning raised questions about Mr Edmunds, the former finance director who replaced Ulf Henriksson as chief executive last March, pledging an “increased focus on execu- tion”.

Mark Wilson, at Collins Stewart, said: “It has severely impacted my confidence in management’s ability to deliver the promised margins from what has actually been quite a positive order intake. Without that confidence it is difficult to be bullish on the shares.”

Morgan Stanley noted it was the second profit warning in the sector this week after Dutch group Philips on Tuesday, and said it would likely trigger a 20-25 per cent reduction in its operating profit target for Invensys.

“Given the complexity of the China project, we are not especially surprised,” Morgan Stanley said.

Invensys also said its appliance controls business was continuing to suffer from weak consumer demand in Europe and north America, partially offset by stronger commercial and wholesale markets.

The group was formed from the merger of engineering businesses BTR and Siebe in a 1999 deal that left it saddled with debt.

In recent years it has turned to emerging markets, winning contracts in oil and gas, as well as rail signalling deals in Saudi Arabia and Turkey and the nuclear power work in China, as demand in Western economies remained muted.