LONDON British engineering firm AMEC AMEC.L expects its margins to recover this year after they were hit in 2012 by additional procurement activity for some of its big customers at low or no margins.
Shares in Amec fell more than 7 percent on Thursday after the company said its margins slipped to 8 percent from 9.2 percent, even as it posted an 11 percent rise in annual earnings and a dividend hike.
The company's CFO Ian McHoul said the lower margins were attributed to AMEC taking on more procurement activity for some of its largest customers during the year. AMEC secures high margins through its design and engineering work, but it also procures supplies on large contracts with little or no margin generated.
"Underlying there is a 60 basis point reduction," said McHoul.
"Going forward we're flagging a gradual increase in margins, we don't see it as any kind of permanent feature," he added.
AMEC, which designs and builds infrastructure for the oil and gas, mining, nuclear and renewable energy sectors, added that cost efficiencies are expected to come through during the year.
The company said its annual earnings rose 11 percent thanks to a surge in revenue from oil and gas activity in regions such as the Gulf of Mexico, which is set to continue this year it added.
But margin erosion and the recent completion of the company's buyback program disappointed investors.
"Margin guidance looks disappointing so forecasts will come back a little," said analysts at Liberum Capital.
AMEC, which serves customers such as ConocoPhillips, GDF Suez and Centrica, is also vying to pick up large nuclear decommissioning work in Japan following on from the Fukushima disaster.
Chief Executive Samir Brikho, who will travel to Japan within the next month, said there will be "enormous opportunities" for AMEC, with a clearer picture on the time frame of contracts after his visit.
The FTSE-100 company posted earnings before interest, tax and amortization (EBITA) of 331 million pounds ($514 million), 11 percent higher than in 2011, and in line with an average forecast of 329 million in a company-supplied poll.
Saipem, Europe's biggest oil service group, shocked investors last month when its newly-installed management slashed 2012 profit guidance and gave a grim outlook for this year, triggering a 34 percent fall in its shares.
AMEC said it is on track to meet its targeted earnings per share of more than 100 pence by 2015 with its order book at 3.6 billion pounds against 3.7 billion a year ago.
The company proposed a dividend of 36.5 pence per share.
Shares in AMEC, which have gained 10 percent since the start of the year, were down 6.14 percent at 6:22 ET, the biggest faller in a weak London share market.
(Reporting by Lorraine Turner; Editing by Rosalba O'Brien and Hans-Juergen Peters)