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Why Transfield shares got crushed

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What: Shares of Transfield Services Limited (ASX: TSE) fell by over 13% by lunchtime today, after revising its full year FY2012 guidance. The company now expects full year reported net profit after tax to be around $105m pre-amortisation, down from $130m announced on 22nd February 2012.

So what: The revision is due to $9m of extreme weather impact since 22nd February 2012, plus $16m of provisions for a legacy construction contract. A cyclone in Western Australia and unusual extreme weather in South Australia and Queensland were not budgeted for, while additional costs were incurred to meet changes in the construction project’s scope, delays in material supply, and geotechnical problems – while still meeting the client’s schedule.

Now what: Weather is unpredictable, and usually an acceptable reason for cost blow outs. The blow out in contract costs appears to suggest a lack of effective risk management practices during project development and delivery cycles. If a client changes the scope of a project, usually the client would be liable for the additional costs.

Yet another reason to avoid this infrastructure services company.

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Motley Fool contributor Mike King doesn’t own shares in Transfield. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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