Review reveals contract costs overruns for Severfield-Rowen

STRUCTURAL steel group Severfield-Rowen has indicated that it could look to raise £50m through an equity fundraising as the company today revealed the results of an internal review into contract costs.

Following the dismissal of chief executive Tom Haughey last month, the North Yorkshire-based business committed to undertake a review into why costs overran on a major project.

Unveiling the results of the review this morning, Severfield-Rowen said it would take a £20.1m charge to its profit and loss account for 2012 as it found some contracts would be more expensive than anticipated or take longer to complete.

The company said it had held “positive discussions” with a number of its major shareholders representing more than half of the group’s share capital. 

“As a result of these discussions, all of these shareholders have indicated that they are supportive of a potential equity fundraising by the group of up to £50m,” Severfield-Rowen said.

The company added that “constructive discussions” were also continuing with its lending banks “who have agreed to waive certain financial covenants in the existing banking facilities, that were due to be tested on 31 December 2012, whilst discussions regarding amended banking facilities for the group are progressed”. 
 
The group said trading conditions remained difficult but that its Indian joint venture had performed in line with expectations.
 
“As a result of the review and the wider trading backdrop, the board has taken a more prudent view of the overall prospects for the group in 2013 and into 2014 and, accordingly, its expectations are now somewhat lower,” it added.
 
Chairman John Dodds said: “Despite the disappointment of the financial impact on the group from the findings of this review, I am encouraged by many of the conclusions drawn from it and by the actions we will be taking to improve our business.

“This is a good business which remains well supported by its customers. “I am also greatly encouraged by the strong and visible support we have received from our leading shareholders and the constructive discussions we continue to have with our lenders around the longer term financing of the Group. We believe that the Group can return operating margins to between 5% and 6% over time and I am confident that the longer term fundamentals of the Group remain strong.”

Severfield-Rowen has assessed 70 of its contracts representing around 90% of its contracts by value. Nine contracts were found to have issues. 
 
“The review has….identified a requirement for stronger contracting processes and discipline notably in execution and risk assessment, particularly in relation to its more complex contracts,” the group concluded. “The implementation of these improvements will be undertaken as expeditiously as possible.”

Loss making contracts include 122 Leadenhall Street in London – a building known as the ‘Cheesegrater’.

Following the review, an expected profit on the contract has become a £9.9m loss.
 
The review has identified actual and potential cost overruns on three further contracts totalling £2.9m.

On a further five contracts, the value expected to be realised by Severfield-Rowen has been reduced by £7.3m.