A hugely complex set of full year results from Balfour Beatty have had little impact upon the share price. The group says that it is making progress on its transformation programme and intends to reinstate dividends (level undisclosed) from the 2016 interim stage onwards. CEO Leo Quinn talked about the group making progress rationalising operations and reducing costs as it seeks to correct the damages caused by a decade of previously "forced growth", where acquisitions and under-bidding compensated for a lack of underlying progress.
The underlying cash performance improved dramatically, but was still negative and losses on the troubled UK Engineering business were much reduced. Profits declined in US Construction Services, whilst activity in UK Construction Services was down over 10%, reflecting the withdrawal from the areas that had proven most troublesome in recent years. The Infrastructure Investments portfolio delivered a flat profit outcome, with a decline in portfolio value from £1,300m to £1,244m reflecting disposals made during the year.
In terms of the numbers, Balfour Beatty reported revenue of £8.4 bn, (2014: £8.8bn) with a loss from operations of £182m (2014: loss £281m). On an underlying basis, revenues fell from £8.4bn to £8.2bn and the pre-tax loss widened out from £80m to £123m.
Balfour Beatty (BBY) is one of the largest "turnaround situations" in the UK market, with billions of sales on both sides of the Atlantic and losses wherever one looks. CEO Leo Quinn began his career there and went on to succeed in restoring De La Rue and Qinetiq to something approaching good health before returning many years later, to find his alma mater in dire need of the same treatment.
Forced growth is a difficult condition to treat. Essentially Mr Quinn has diagnosed a business that sought to hide underlying difficulties by boosting the top line through M&A and through accepting excessive risks by bidding for work at low margins. That left too many contracts that were destined to generate losses, if the slightest thing went awry, plus a cost base full of duplications, because acquired businesses had not been properly integrated.
Fortunately, the group has been able to sell assets to tide it through, and the portfolio of investments in PPP and PFI projects turned out to be worth far more than was expected a few years ago. They also managed to keep clients onside, and more importantly, clients' upfront payments on the balance sheet, for BBY uses the best part of a billion pounds of client money to fund its operations.
So Balfour Beatty have pulled through the worst and now, so long as their markets do not lurch into recession, Mr Quinn will hopefully see the benefit of the actions he has taken. But the markets BBY serve are volatile and much of what they do is relatively low margin work. So BBY is never going to fall into the "widows and orphans" category.
Consensus has earnings recovering strongly over the next few years, and forecasts for FY 2017 have been edging higher in recent months. Even so, analysts are not expecting a return to historic profit levels anytime soon, and on that basis, dividends are likely to be relatively modest for the foreseeable. Investors need to be playing a long game here, with a close eye on the macro situation, for if that turns hostile, Mr Quinn really will have his work cut out.
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