Project overruns set to hit Severfield profits

COST overruns on two UK projects could dent annual profits at steel producer Severfield-Rowen, the company warned yesterday.

The group’s shares tumbled almost seven per cent after the Thirsk-based company said its full-year profits might be lower than market estimates as it expects cost overruns of £1.6m on two projects in the UK.

The company declined to say what the projects are.

The group’s shares closed the day down 11.25p at 153p.

This was an improvement on the 17 per cent decline in share price in early trading, although the final share price made Severfield one of the top percentage losers on the London Stock Exchange’s small cap index yesterday.

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The group’s best known projects include the Shard skyscraper at London Bridge, the Cheesegrater skyscraper in the City of London, the 2012 Olympics stadium, Wimbledon’s Centre Court and Arsenal’s Emirates Stadium.

The company, which said last month it anticipates full-year results to show a marginal improvement over 2011, said: “While we still expect to deliver profit growth year on year, profit for the full year may be lower than current expectations.”

The company expects first half pre-tax profits of £1.5m, down from £3.4m last year.

The group expects to see an even greater weighting towards the second half of the year. A company spokesman said the two projects remain on track for completion in line with customers’ timetables.

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Severfield said that both projects are complex and it is thought that the company was on site for longer than expected, which racked up more site hours than had been predicted.

Analyst Dominic Convey, at Peel Hunt, said: “The UK recovery remains impossible to predict and this announcement highlights the inherent contract risk within the business model.

“Our through-the-cycle valuation model supports our 220p target price. However we see no obvious short-term catalyst and so the share remains a ‘hold’, pending greater visibility on the required second-half profit recovery.”

Mr Convey said Peel Hunt is reducing its 15-month pre-tax profit forecast by £2.2m to £14m. He said this reflected the £1.6m of additional costs relating to the two complex projects plus caution over the second-half bias.

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In March, the group announced a 15-month trading period to March 2013 to align the financial period-end of the UK business with that of the group’s Indian joint venture.

Analyst Andy Douglas, at house broker Jefferies, said: “Whilst it is hard to look at these things purely in isolation, we trust that these heightened costs are one-off in nature, and fundamentally the strength of the UK business remains firmly intact – although this will be considered a blow – and the order book gives good visibil-ity.

“There is no update in respect of the Indian joint venture, hence we assume that this continues apace – this remains vitally important, in our view, as there is considerable value in the joint venture within the current share price,” he added.

Mr Douglas said he is retaining his ‘hold’ recommendation on the stock.

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Severfield said last month that it continues to perform well in the UK, despite sentiment remaining subdued given the economic and sector backdrops.

At the time, the group said its UK order book of £216m “remains strong”, and is “broadly level” with the £221m order book reported in March this year.

It added that operations in India are making good progress, with the order book standing at £36m.

While this is lower than previously reported, the firm said it provides for all of its production requirements for the remainder of this calendar year and is supported by “a growing and higher quality pipeline of prospects” now approaching £100m.

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The group said it remains cautious about the timing of UK economic and construction sector recoveries.

In March the company said annual profits fell by a third and there was no sign of an imminent UK recovery.

The group said 2011 was a year of slow demand and tough trading conditions.

These were exacerbated by diminishing confidence levels for business prospects in 2012.

A footprint on landmarks

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Aside from The Shard and the Olympic stadium in London, Severfield-Rowen’s main projects over the past year have included Heathrow Airport, Blackfriars Bridge in London, Gatwick North Terminal, the Titanic Quarter in Belfast, the Philharmonic Hall in Paris and the Leeds Arena.

It has also carried out work for a number of retailers including Morrisons in Bridgwater, Marks & Spencer in Cheshire Oaks, Asda in Birkenhead, Ocado in Tamworth and work on the Co-operative headquarters in Manchester.

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