UPDATE 2-Balfour Beatty boss quits after profit warning

Tue May 6, 2014 7:34am EDT

* Shares fall 18 percent, biggest loser on FTSE 250 index

* Chief Executive Andrew McNaughton steps down

* Pretax profits seen in range of 145 to 160 million pounds (Adds executive chairman quotes, analyst reaction, shares fall)

By Li-mei Hoang

LONDON, May 6 (Reuters) - Almost a fifth was wiped off the market value of British infrastructure group Balfour Beatty after it warned its 2014 profits would be significantly lower than expected and its chief executive stepped down.

The company said the weakness came from its British construction business, where it now expects a 30 million pound ($50.6 million) shortfall in 2014, as it was hit by a slowdown in demand for large infrastructure projects and lost out on contracts to rivals.

As a result, it expects overall pretax profits for 2014 in the range of 145 million to 160 million pounds. The mid point is about 19 percent below the average analyst forecast of 190 million pounds, according to Thomson Reuters data.

Balfour CEO Andrew McNaughton, who took over about a year ago, stepped down after the profit warning.

Shares in the company fell 18 percent to 234 pence by 0906 GMT, making it the biggest loser on the FTSE 250 index and wiping about 390 million pounds off its market value.

While housing building in Britain has surged in the past year, the wider construction industry has been slower to recover from the financial crisis as contract lead times tend to lag behind residential building work by at least 18 months.

The company said, along with the tough market climate, it had lost out on contracts to competitors due to "poor operational delivery issues".

Last year rival Carillion picked up a contract in October worth 800 million pounds to build Airport City in Manchester, and another in November for 180 million pounds to build UK highways.

"This is about poor management and failure to implement a good strategy over many years at Balfour Beatty and not the markets in which it and others operate," said Whitman Howard analyst Stephen Rawlinson.

"Our concern is that there is more bad news to come."

GAME CHANGER

Balfour, which operates in over 80 countries, said it was looking into the possible sale of its engineering consultancy Parsons Brinckerhoff which it bought in 2009 for $626 million.

"The latter is arguably the most shocking, since it was supposed to be the game changer when it was bought, transforming the group into a full value chain design-construction-services provider," said Westhouse Securities analyst Alastair Stewart.

Balfour Executive Chairman Steve Marshall said the board launched a strategic review of the group at the beginning of the year as part of plans to simplify its business after it flagged difficult trading conditions earlier this year.

"It's going to take time to resolve these issues. My own view is that it will take a further 12 to 18 months to set our entire UK construction business on a firm recovery path," said Marshall, who will head the firm until a new CEO is found.

Balfour said in March it expected to "make modest progress in 2014", having posted underlying pretax profit of 187 million pounds in 2013.

The company, which is overseeing the transformation of the London Olympics Stadium into a facility for West Ham United Football Club, said it had experienced significant operational issues in its mechanical and electrical engineering businesses and delays in some of its major building projects.

"It's fair to say that operational delivery in UK construction has fallen below the standards that this group expects," said Marshall.

The group said its professional services, support services and investments division continued to perform well and were in line with management expectations.

"The surprise (of the profit warning and CEO departing) is going to have an impact but it is a short term one, the rest of the group is doing fine," said Marshall.

($1 = 0.5929 British pounds) (Additional reporting by Sarah Young; Editing by Kate Holton and Pravin Char)