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Balfour Beatty - operating profit rises despite revenue dip

George Salmon | 14 August 2019 | A A A
Balfour Beatty - operating profit rises despite revenue dip

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Balfour Beatty plc Ordinary 50p

Sell: 253.00 | Buy: 253.60 | Change -1.60 (-0.63%)
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Underlying operating profits increased 9% to £72m, despite a 2% decline in revenues, after excluding the impact of exchange rates. That reflects improved margins in the UK construction and Support Services divisions.

The group also said it has raised its net cash target by £50m for the full year, while the interim dividend of 2.1p is 31.3% up on last year.

The shares rose 8.3% in early trading.

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Our view

Four years on and the Build to Last programme is starting to pay dividends.

When CEO Leo Quinn returned to Balfour Beatty to take the top job, he was greeted by a business in serious need of help. He took the bull by the horns and is effecting a turnaround. The key component of this has been to stop Balfour bidding for contracts at unsustainable, loss making, margins.

An inefficient cost base has also been overhauled, and the net effect is one for underlying profits to rise.

Healthier margins mean this is possible despite revenue growth stuttering. That reflects the fact Balfour is still operating in a very competitive market place, and its refusal to bid below a certain price means it's losing out on some contract wins. Overall though, the order book is swelling and the new approach means what is in the pipeline is more profitable.

For all the good news, Quinn and his team aren't resting on their laurels. The next round of Build to Last will see margins improved even further. Not content with just making industry standard margins, the UK business is expected to reach operating margins of 2%-3% at the full year.

The nature of the business does mean some caution is needed though, because Balfour's fortunes are closely tied to the ups and downs of the economy. Economic and political uncertainty still looms loom large, both at home and across the pond. To its credit, there is net cash on the balance sheet - more than anticipated in fact - and that means the group's in a sturdier position than in the past.

All-in-all, Balfour has made some good progress, but the work's not over yet. The shares offer a prospective yield of 3.6%, so investors could get paid to wait and see if the next leg of the turnaround goes to plan. As ever though, that's provided the economy behaves itself, and dividends aren't guaranteed.

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Half year results

In the UK construction business, operating profit rose from £5m to £17m, reflecting an improvement in operating margin to 1.7%, and a 7.1% rise in revenue, to £1bn. The group said the major Aberdeen Western Peripheral Route project was now complete, and new contract wins in the period included a £1bn HS2 contract. The order book is has risen from £2.7bn to £3bn.

In US construction, underlying revenue rose 3%, ignoring the impact of exchange rates, to £1.7bn. With a stable margin of 1.1%, this meant operating profit rose from £17m to £19m. The order book rose by 8% to £5.6bn.

The timing of projects in the Gammon joint venture meant revenue dipped to £380m, with operating profits falling from £10m to £9m.

As expected, Support Services revenue decreased by 7% to £503m, as the Area 10 highways maintenance contract ended, as well as lower volumes in the power business. However, underlying operating profit increased slightly to £18m as margins rose to 3.6% (2018: 3.1%).

Earnings in the Infrastructure portfolio were £25m, with £16m coming from disposals. The number of projects in the portfolio dipped to 72 from 74, with the portfolio value fell slightly year-on-year, to £1.2bn.

Improved profitability helped the group's average net cash balance improve from £161m to £290m. The net cash guidance range for the full year has been increased to £280m - £300m.

Balfour remains confident it will perform in line with market expectations in 2019, with key divisions achieving industry standard margins for the full year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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