Business Analysis: Third profits warning piles on the agony for Jarvis

Steve Norris is to face Ken Livingstone in the London mayoral elections in June but surely as daunting a task is his role as chairman of Jarvis.

To say that Jarvis has had an unfortunate history would be a huge understatement. Yesterday provided the latest set-back: its third profits warning in three months and the ejection of the group finance director, Robert Kendall.

The engineering and construction company still stands accused in the public mind over the 2002 rail crash at Potters Bar. In the City, Jarvis continues to be accused of overly aggressive accounting practices. Industry insiders said the accounting issue went back many years - the company fell out five years ago with its then auditor, PricewaterhouseCoopers, in a dispute about booking revenues that had not actually been received.

Yesterday, the company's statement pointed to a similar problem. In its accommodation services division, which builds and refurbishes schools and provides housing for university students, previous market expectations of a £5m profit will not be met. Instead, there will be a loss of about £5m. The head of the accommodation business, Andrew Sutton, quit in February.

Jarvis also has a large rail division, and although it has exited maintenance work the company continues to be a player in rail renewals. The third leg of the group is the more straightforward business of building roads.

The company yesterday confessed to further cost overruns in the accommodation business, which follows a profits warning at the end of January. Money that Jarvis had previously been counting on, as recoverable from clients, will no longer be coming in. The clients, it seems, will not be paying up, leaving Jarvis with the bill. In addition, Jarvis announced that it was selling the equity interests in these accommodation projects at a loss of £6m.

Philip Sparks, at Evolution Beeson Gregory, described the disposals as a "firesale". A small silver lining was provided by the news that it had won two new accommodation contracts. He said: "Jarvis' year-end update made grim reading. The statement had all the hallmarks of a company in severe decline.... Jarvis is looking more and more like a shrinking commodity services business struggling under a history of aggressive bidding."

There have been persistent stories this year of unhappiness among clients at Jarvis' work, especially over the £313m refurbishment of schools in Kirklees. The company was said to have "grossly overvalued" the likely costs when it bid for the work. The issue even featured on national television, in the BBC's The Money Programme in March. Jarvis had denied these claims but yesterday's announcement saw the company reveal more problems in accommodation services. Jarvis said: "The loss for the [accommodation] division has primarily been caused by overruns on construction costs for a number of the refurbishment contracts."

The company said the problems lay with the kind of contracts it had been employing in the accommodation business. "Future construction contracts will either use far fewer subcontractors or alternatively contracts will be direct-let to a construction partner who will bear their own bidding costs," Jarvis said.

The company also warned that its dividend was under "review" - that is, it faced the chop. Jarvis shares plummeted 27 per cent yesterday. Geoff Allum, at Investec Securities, said: "One has to assume the banks are now calling the shots.... Our forecasts show negative cash flow over the next few years. To avoid breaching its banking covenants, Jarvis will have to sell things."

Robert Kendall was yesterday replaced as finance director, a post he had held for three years. The company's director of corporate affairs, Alistair Rae, will become acting finance director. Mr Kendall is expected to receive a pay-off of £222,000.

Mr Allum was not amused. "This was not an orderly handover. With the financial difficulties hanging over Jarvis, the last thing the company needs is for its finance director to resign," he said. However, Emma Ormond, at Oriel Securities, said: "Mr Kendall has rightly had to carry the can for the weak financial situation that has clearly come to light. They now really need a branch-and-root review of their business. It's quite a flabby business and there are plenty of costs that come out."

As well as Mr Kendall and the departure of the head of Accommodation Services, Jarvis also saw the exit, in November, of Paris Moayedi, the Iran-born chairman and former chief executive. Mr Norris took the chair.

Mr Moayedi (he changed his first name from Parviz as no one could pronounce it) was brought in as chief executive in 1994. Jarvis was then a struggling construction company and he hugely expanded the business. He saw the new opportunities opening up in the 1990s in the private finance initiative and in the rail industry's privatisation. He bought a rail maintenance company - along with its 3,500 staff - in 1996. The accommodation services division was created in 1999.

Mr Moayedi, an engineer with 30 years' experience in the construction industry, had ideas and he was also a very hands-on manager - few things got done without his approval.

Following the Potters Bar rail crash, which killed seven people and injured more than 70, he cut a particularly striking figure. Jarvis had the maintenance contract for that part of the track. Mr Moayedi insisted that sabotage was the cause, a line the company maintains to this day. The final official report into the tragedy has yet to be published.

However, with the seemingly constant problems that afflicted Jarvis, Mr Moayedi was first made chairman last spring - with Kevin Hyde becoming chief executive - and then he was eased out altogether in November.

As well as the company's blunders, it is a sign of the group's bad luck that one recent chairman, Colin Skellett, resigned after being accused of taking bribes (at another company) - he was later cleared. Then his replacement, Lord McGowan, died in office last year, at which time Mr Moayedi took the position.

The company's basic problem has been handling the risks in rail and PFI. The rail industry was in an appalling state, after years of underinvestment. Any company taking responsibility for tracks was bound to be running risks. As for PFI work, the fiendishly complex contracts required a meticulous approach and conservative accounting practices. Jarvis is not the only company to have been caught out by PFI.

Uncertainties continue to hang over the future of rail and PFI, Jarvis' main businesses. Mr Hyde yesterday vowed to "streamline and simplify the group and improve levels of transparency". The City waits, with some scepticism, to see if he can deliver a more predictable and more tightly managed Jarvis.