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Balfour Beatty - revenues build and margins rise

Nicholas Hyett, Equity Analyst | 11 March 2020 | A A A
Balfour Beatty - revenues build and margins rise

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Balfour Beatty plc Ordinary 50p

Sell: 262.00 | Buy: 262.40 | Change -0.60 (-0.23%)
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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.

The shares rose 11.5% in early trading.

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Our view

Five years on and CEO Leo Quinn's Build to Last programme is paying dividends. Investors will be pleased to see a hike in the pay-out, although they'll hope the confidence expressed by this move in the face of coronavirus doesn't turn out to be misplaced.

So far the group hasn't had to close any sites because of the virus, but it's still too early to assess the final impact.

When Quinn returned to Balfour Beatty to take the top job, he was greeted by a sprawling business where profits played second fiddle to revenues. His turnaround plan has focused on overhauling an inefficient cost base and stopping Balfour bidding for contracts at unsustainable, loss making, margins. The net effect is a smaller, but profitable, business.

While healthier margins had been offsetting stuttering revenue growth, Balfour has now returned to growth in the top line. But the group is still operating in a very competitive marketplace, and the refusal to bid below a certain price means it's losing out on some contracts. That's not stopped the overall order book swelling though, and the new approach means the pipeline should be more profitable.

For all the good news, Quinn and his team aren't resting on their laurels. The next phase of Build to Last should see margins improved even further. Not content with just making industry standard margins, the group's looking to move ahead of the competition in 2020.

However, the nature of the business does mean there's some need for caution. Construction, and therefore Balfour's fortunes, are closely tied to the ups and downs of the economy - and the current economic and political uncertainty could mean there are bumps in the road ahead. Furthermore, while we commend the group on achieving industry standard margins, construction industry margins are pretty slim, leaving little room for error. To Balfour's credit, there's net cash on the balance sheet and that should provide some sort of safety net.

All things considered, Balfour has made good progress in a tough industry, but the work's not over yet. The shares offer a prospective yield of 3.6%, which is hardly generous given the risks involved, but could grow if the next leg of the turnaround goes to plan. That's provided coronavirus isn't overly disruptive though, and even then dividends aren't guaranteed.

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Full Year Results

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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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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