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Balfour Beatty - dividend delayed and under review

Nicholas Hyett, Equity Analyst | 27 March 2020 | A A A
Balfour Beatty - dividend delayed and under review

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Balfour Beatty plc Ordinary 50p

Sell: 253.60 | Buy: 256.00 | Change -1.40 (-0.55%)
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Balfour Beatty has announced a delay to its AGM and final dividend. The "appropriateness of paying the final dividend" remains under review.

The group enjoyed a positive start to 2020, but notes the significant disruption caused by the coronavirus outbreak. However the group's UK construction sites remain open where it's possible to comply with Public Health England guidance, while US and Hong Kong sites are complying with relevant local government guidance.

As at 25 March 2020 the group has £395m of net cash and £375m of undrawn facilities. The group does not feel able to issue full year-guidance under current conditions.

The shares were broadly flat following the announcement.

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Our view

Balfour has made some great progress in recent years.

CEO Leo Quinn's Build to Last programme returned the group to something resembling industry standard margins last year and the order book also finished 2019 looking healthy. The next phase of the strategy called for the group to move above standard.

Unfortunately with the coronavirus outbreak we think that's very unlikely to be achieved any time soon. And this year could be a real struggle.

"Standard margins" in the construction sector are pitifully thin. An operating profit margin of 3% is pretty impressive in the UK, while in the US as low as 2% would be good going. That leaves little room for error, and if costs overrun or bills don't get paid it doesn't take much to push companies into loss making territory.

The good news is that, so far, many of Balfour's sites have remained open, even if that is a relatively controversial decision. Productivity might have reduced given the new working practices, but at least it will help keep cost overruns down. We also expect an infrastructure splurge from governments around the world once the lockdowns are over to help kick-start the economy. That should provide support for large construction groups in an economic environment that might otherwise be pretty unappealing.

The other side effect of Quinn's more disciplined approach to managing the business in recent years is that the balance sheet is in reasonably good shape, with access to significant liquidity in the short term.

However, despite the positives there's need for caution. Construction is cyclical and large construction companies have a worryingly high corporate mortality rate (Carillion being the most recent example to vanish from the stock markets). Balfour could yet be forced to shut its sites, and if the lockdown continues for an extended period of time the strain on the balance sheet will mount.

It's reassuring to see the group taking steps to cut cash costs - even if the dividend suspension is painful and management's 20% pay cut largely aesthetic. Dividends can be made up in the future if things turn out better than expected, but in the current environment discretion is very much the better part of valour.

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Full Year Results (11 March 2020)

Underlying revenues rose 7.7% to £8.4bn in 2019, with growth in both the UK and US. Underlying profit from operations rose 7.8% to £221m while the value of the investment portfolio decreased slightly following the write down of US military housing assets.

The board announced a final dividend of 4.3p per share, taking the full year total to 6.4p, up 33% on the year before.

Revenue in UK construction services rose 16.5% year-on-year to £2.2bn, with operating profits of £47m up 67.9%. US construction services revenues rose 12.7% to £3.8bn, with operating profits up 18%. That puts margins for both divisions within the industry standard range, albeit at the lower end. The significant margin improvement in the UK reflects the completion of certain loss making contracts, notably the Aberdeen Western Peripheral Route.

Revenues from Balfour Beatty's Hong Kong division Gammon were broadly flat year-on-year, and profits improved 13% to £26m. The group said it's "too early to assess the full effects of the COVID-19 virus" on the division.

Support Services reported revenue of £1.0bn, down 7% year-on-year as expected. However, operating profit rose 2% to £47m.

The directors' valuation of the Infrastructure Investments portfolio fell 7% compared to last year to £1.1bn. That reflects a number of disposals during the year and a write-down in the value of the US military housing portfolio, following an investigation into the group' activities by the US Department of Justice.

Balfour Beatty's order book rose 13% in the year to £14.3bn. That reflects new orders in US Construction market but does not include recent HS2 announcements. Including HS2 contracts the order book would have risen around 40%.

The group finished the year with net debt of £20m, or £512m net cash on an underlying basis (a significant improvement year on year).

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