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Balfour Beatty - disposals boost full year profit

Nicholas Hyett | 14 December 2018 | A A A
Balfour Beatty - disposals boost full year profit

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Balfour Beatty plc Ordinary 50p

Sell: 257.40 | Buy: 257.80 | Change -0.40 (-0.16%)
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Second half revenues are on course to be in line with the first six months of the year - although profits will be higher than previously expected thanks to £65m of Infrastructure Investment disposals.

The shares rose 3.8% in early trading.

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Our view

CEO Leo Quinn began his career at Balfour Beatty. He went on to restore De La Rue and Qinetiq to something approaching good health, before returning to find his alma mater in dire need of the same treatment.

He diagnosed a business that sought to hide underlying difficulties through M&A and accepted excessive risks by bidding for work at low margins. That left too many contracts that were destined to generate losses, plus a cost base full of duplications, where acquired businesses had not been properly integrated.

Those problems will sound uncomfortably familiar to Carillion investors. That's because they're systemic problems in the sector. Balfour Beatty investors should be grateful for Quinn's tough love approach, and an investment portfolio that provided vital cash during the group's darkest days.

The group is now coming to the end of phase two in the 'Build to Last' turnaround plan. Having spent a painful period weeding out underperforming contracts and slashing costs the core construction business is back on an even footing.

Margins are at or approaching the industry norm, thanks to a more selective approach to bidding - aiming only for those set to generate a healthy return. UK construction remains a weak spot, but the group is confident of hitting its 2-3% margin target by the end of the year.

Phase three, building a premium into margins, gets underway in 2019. But with several divisions at the bottom end of average, it's a big ask. Convincing customers to pay a premium at all in an industry that's notoriously competitive on price will be a significant challenge.

At least market conditions seem to be swinging in Balfour's favour. Governments on both sides of the Atlantic are loosening the austerity purse strings to spend on infrastructure, and that seems to be helping the order book.

However, there's still some way left to go before profits return to historic levels. And that's assuming the economy behaves itself. Construction spending is cyclical, and Balfour is very exposed to slowdowns or changes in government policy - although with debt wiped from the balance sheet, the group is looking far more resilient now than in the past.

While some reasonable progress has laid the foundations, we think Balfour remains a work in progress. The prospective dividend yield is just 2.6% this year.

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Trading Update

All Balfour's operating businesses are expected to meet their Phase Two Build to Last targets of industry standard margins during the second half.

Profit growth and disposals have allowed the group to cut debt by 45% over the last 12 months, and now expects to finish the year with net cash of £185m.

The order book at year end is expected to be around £12bn (2017: £11.4bn).

In Construction Services all three business units, the UK, US and Far East, are expected to achieve industry standard margins. The troubled Aberdeen Western Peripheral Route project is expected to be completed in 2018.

Support Services is now expected to see profits grow, with margins improving. The division continues to focus on cost reduction and restructuring, and won a £103m highway maintenance contract with Telford and Wrekin Council during the period.

Balfour sold its interest in Fife Hospital and part of its stake in Edinburgh University student accommodation during the second half. Both transactions were ahead of the Directors valuations as at 30 June, and the Infrastructure Investment business continues to selectively invest in new opportunities.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.