Problems with payments cost Shanks pounds 19m: Provision prompts sharp downgrading by analysts

SHANKS & McEwan, the waste management group, has been forced to make a pounds 19.3m provision because of problems in receiving payment for roadwork projects by its small construction business.

The provision is huge in relation to the size of Shanks's civil engineering activities, which made a pounds 2.7m profit on sales of pounds 48m in 1992. In effect, the sum amounts to about seven years' profits - or eight months' work - by its construction arm.

Shanks said the provision would be charged against group profits for the year ended 27 March, which are to be announced in the next few weeks.

It said overall pre-tax profits, subject to auditing, totalled at least pounds 29m before the provision - which implies that its profits would emerge at about pounds 10m for the year, against pounds 31m in the previous year. However, the final dividend is to be maintained at 3.44p a share.

The warning prompted a sharp downgrading of profits forecasts by City analysts, with Roger Hardman of James Capel slashing his 1994 estimate from pounds 33m to pounds 29m before tax.

The shares tumbled 16p on the news but recovered later to close 8p lower at 162p yesterday.

The payment delays have been caused by disputes concerning several big UK roadwork programmes, including the A1 and M74. It is understood that the company is claiming additional sums for the projects but customers - which include the Department of Transport and the Scottish Office - have refused to pay.

Shanks said the provision had been made 'to cover both delays and doubt in regard to contractual monies claimed' and the costs of a restructuring of the group's construction division.

It has appointed Anthony Rusk, a former director of Lilley, the building materials company, as the division's chief operating officer, in succession to John Mackenzie, who has retired.

Despite the management change, some analysts feared that the company would be unable to recover all the disputed sums.

'There is danger that the company very badly under-pitched for the contracts,' one said.

The profits warning is the second by Shanks in as many years. In September 1991, it shocked the market by warning that earnings would not be 'materially different' from the previous year.

Two months earlier it had told shareholders that it would grow at a significantly higher rate than the market average.

Last December, it reported a 6 per cent decline in interim profits to pounds 16m due to lower demand for waste treatment because of the recession.

In March it acquired four new landfill sites from Hanson, the industrial conglomerate, for pounds 20.2m. The deal was funded by the issue of 8.7 million shares to Hanson, giving it a 4.7 per cent stake.