Around 83% of Balfour Beatty's UK and US construction sites are now open, albeit at lower levels of productivity as the group implements social distancing procedures. Balfour retains £452m of net cash and £375m of undrawn debt facilities.
Given the level of uncertainty the group is unable to provide guidance on future performance.
The shares rose 2.7% in early trading.
Balfour's 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 looks increasingly healthy. The next phase of the strategy called for margins to move above industry average as the group made the most of its size and expertise.
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 many of Balfour's sites have remained open, even if that was a relatively controversial. New working practices have reduced productivity, but at least the business continues to tick over. We expect an infrastructure splurge once the lockdowns are over, as governments look to kick-start the economy. That should provide support for large construction groups in an economic environment that might otherwise be pretty unappealing.
Quinn's more disciplined approach to managing the business also means the balance sheet is in reasonably good shape. There's net cash on the balance sheet, significant liquidity on hand and the cash burn so far has been modest.
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). Countries and companies will emerge from the crisis laden with debt, and with a possible recession looming that's not historically been good news for infrastructure groups.
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.
Of the 83% of US and UK Construction sites that are open around 17% are experiencing significant disruption due to availability of employees, subcontractors or materials. This has been a particular problem in Scotland, where stricter lockdown procedures are in place, and London, due to public transport disruption. In the US, Washington State and Florida have been severely affected. There have been minimal impacts in Hong Kong, although productivity had reduced.
Employees in the Support Services business have largely been designated as a key workers, and the division has shown good resilience despite some disruption.
Infrastructure Investments has generally continued to function as normal, although maintenance has been disrupted in the US military housing business. The group has not disposed of any material Infrastructure Investments.
The order book increased by 20% compared to the start of the year to £17.4bn. This reflects £3bn of contracts related to HS2, $450m of contracts in the US and a $750m contract relating to Hong Kong International Airport.
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.
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.