LONDON (Reuters) - Balfour Beatty , which issued a second profit warning earlier this year after a poor run in winning major new project work, said on Tuesday it was banking on a stronger UK housing market to restore earnings.
The construction group said it expected to beat market expectations for profit of 174 million pounds this year but analysts said the company's plan to focus more on its lower-margin regional construction business was disappointing and the shares fell 2.5 percent.
"They've had to step back, they've had to take management time and resolve a lot of those issues and in that backdrop, you're probably not going to be out there winning a lot of work," said Numis Securities analyst Howard Seymour.
"Going forward, you would want to see them winning their fair share of work in this market," he added.
The firm, which appointed a new chief executive in June, said that as a result of improved management in its UK construction business it expected to beat market expectations for 2013 after strong demand for its house building-related services in Scotland, the north west of England and London.
"We are currently seeing some pick-up in the pipeline of our regional business largely as result of early flow over from the recovery in housing building," CEO Andrew McNaughton told analysts in a call.
McNaughton said a slowdown in demand for larger infrastructure work would skew the mix of the firm's construction business towards house building services.
Whitman Howard analyst Stephen Rawlinson said the shortage of major projects looked to be more of a problem for Balfour Beatty as rivals were winning work.
Rival firm Carillion picked up a contract in October worth 800 million pounds ($1.28 billion) to build Airport City in Manchester, and another in November for 180 million pounds ($290 million) to build UK highways.
"We would like to see more evidence that the strategy is working and that the markets are improving before becoming positive again", Rawlinson added.
Shares in Balfour Beatty were down 2.46 percent to 277.3 pence at 1526 GMT.
Data on Monday showed that activity in Britain's construction sector, which was severely hit in the financial crisis, last month unexpectedly grew at its fastest pace since September 2007.
"The UK construction market is getting better and that will help Balfour as well, but other companies have benefited from the fact that Balfour got it wrong. It is a recovery stock," said Seymour.
McNaughton cautioned that material and labour costs, which have risen during Britain's economic recovery as decimated supply chains struggle to keep up with demand, could continue to rise.
"We are seeing clear signs in the market of increases in both direct sales and associated industry activity such as logistics," McNaughton said.
"These are lead indicators where future volume increases could lead to cost increases as bulk material suppliers step up capacity production to meet renewed demand."
The company added that some of its markets remain challenging, particularly Australia where it has seen further deteriorations in demand and pricing is expected to continue to impact its business in 2014.
(Reporting by Li-mei Hoang; Editing by David Cowell)