Galliford Try plc (LON:GFRD) said the profit hit from restructuring its construction division will be at the top end of its expected range but it has identified no further problems with legacy or current contracts.
Last month, the FTSE 250 building and regeneration group issued a shock profit warning, saying it would take a £30-40mln hit after being forced to write down the value of major contracts in the construction division.
On Tuesday, Galliford said the charge would be around £40mln, which included write-downs relating to some small current projects and some larger legacy contracts such as the over-budget Queensferry Crossing in Scotland, as well as a restructuring charge.
While the shrinking of the construction division will see revenues drop from £1.5bn to around £1.3bn, the restructuring will also generate annualised cost savings of up to £15m from 2021, making it easier to hit targets for improved operating margins.
Looking across the group, which is now focused on the building, water and highways end markets, management said it was “trading well” and anticipated full-year results will be "consistent with" the range of analyst forecast for profit before tax and exceptional items of £112.7mln to £123.3mln.
Chief executive Graham Prothero, who was promoted from finance director after previous boss Peter Truscott jumped ship in March, said the "difficult decisions" made in response to the challenges faced by the construction business have been accompanied by operational changes across the business.
"We are confident that the decision to refocus our construction activities will deliver a more stable business for the future and support improved margins," he said.
City broker Peel Hunt was positive enough to upgrade its recommendation for Galliford back to 'add' from 'hold'.
In a note to clients, the Peel Hunt analysts said they were impressed by Galliford's ongoing Partnerships performance, while noting that Linden Homes' sales rates were affected by fewer new sites being released.
They pointed out that the building group's figures excluded any settlement of the outstanding claims for the Aberdeen ring road and another major client.
The analysts, who did not make any changes to forecasts on the back of the update apart from lowering their number for revenue from construction, said they saw "no need" to change their 700p target price either at this stage.
"The shares have struggled [in the year to date] on the back of the construction issues and now stand 14% down versus a sector up 14%. As a result the shares now offer material upside to our TP (which assumes a negative £120m value for Construction). Given the ongoing uncertainty about the medium-term profitability of the Construction business we think the market will remain a little wary," they concluded.
Fellow broker Liberum, which has a 'buy' rating and target price of 865p on Galliford, said the update "should be taken well because there are no further incremental contract issues, and because part of the exceptional cost identified in April has a payback through future cost reduction."
"This was largely missed by the stock market, which treated all of the flagged £40m of exceptional as pure value destruction, but should now understand the payback from the restructuring," Liberum's analysts added.
By midday on Tuesday, Galliford shares were up 13% to 607.5p.