* Company says problems in unit will hit profit by 35 mln stg
* Warning comes two months after last downgrade
* Shares fall to more than five-year lows (Adds more analyst reaction, background, updates shares)
By Paul Sandle
LONDON, July 3 (Reuters) - British infrastructure group Balfour Beatty said it would take another 35 million pound ($60 million) hit to profits after trading in its mechanical and electrical engineering division deteriorated.
Shares in the group opened down 16 percent at a more than five-year low after the unscheduled warning, which came two months after its last profit downgrade that resulted in its chief executive stepping down.
The shares, which had already fallen 19 percent since the start of the year, were trading down 11 percent at 207 pence at 0840 GMT, the worse performer on the mid cap index.
Balfour Beatty said on Thursday it would make up the shortfall by selling more of its public-private partnership infrastructure investments - projects such as schools and hospitals - in the second half of the year.
It said 30 million pounds of the shortfall related to a small number of contracts, mainly in London, which were dogged by delays, design changes and contractual disputes.
Order intake had also reduced, it said, resulting in lower revenue expectations and a 5-million-pound reduction in forecasted profit.
Analyst Alastair Stewart, who put his "neutral" rating on the stock under review, noted the shortfall would be broadly offset by further PPP disposals.
"However, we believe this will not impress investors and could feed the impression that Balfour Beatty is selling the family silver to pay for problems in the comparatively small M&E business," he said.
Balfour, whose activities include maintaining roads, managing power transmission lines and major construction projects such as the London 2012 Olympic stadium, said it would reduce the size and footprint of its engineering services unit.
In London, it said it would only work with other companies within the Balfour group where it could influence design and add value for money.
Analysts at Liberum, who have a Buy rating on the stock, said the group would use its PPP portfolio for another bailout.
"Whilst the pace of ongoing decline at Mechanical and Engineering is a concern, the market should take some comfort from the fact that the remaining 90 percent of the business is on track and should not lose sight of the substantial recovery potential," they said.
Balfour said gains from selling more of its PPP investments in the second half would keep it on track to meet its full-year group pretax profit guidance of 145 million to 160 million pounds.
Its disposal programme has delivered gains of 51 million pounds this year, it said, helped by a favourable secondary market for infrastructure assets.
Recent sales include its 50 percent share in the University Hospital of North Durham project and its 100 percent interest in Knowsley Building Schools for the Future last month.