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Balfour Beatty - full year results to be as expected

Sophie Lund-Yates, Equity Analyst | 9 December 2020 | A A A
Balfour Beatty - full year results to be as expected

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Balfour Beatty plc Ordinary 50p

Sell: 324.80 | Buy: 325.00 | Change 5.40 (1.69%)
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Balfour Beatty has said it expects full year revenue to be in line with 2019, at £8.4bn.

All Balfour Beatty's sites are now open, and full year results are expected to be in line with previous expectations. This performance means the group has decided to reinstate dividends. Balfour intends to pay a final dividend at the end of the financial year, and start a £50m share buyback programme in January 2021.

The shares rose 1.3% following the announcement.

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Our view

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 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. Analysts expect operating margins to stick around the 2% mark between 2021 - 2022, after recovering from 0.5% this year. Low margins leave little room for error.

The good news is that many of Balfour's sites remained open during the disruption, even if that was a relatively controversial decision. And all sites across each of Balfour's geographies are operating. 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.

We're also encouraged by Balfour's ability to win, and keep hold of, business contracts during the disruption. A growing order book is not something all construction companies can boast right this moment.

Quinn's more disciplined approach to managing the business also means the balance sheet is in reasonably good shape. There's more net cash on the balance sheet than expected and significant liquidity.

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.

The intention to reinstate the dividend is certainly a mark of confidence, and suggests things are faring better than Balfour expected. But investors should remember Balfour Beatty's fortunes will wax and wane with the wider economy. The continuation of, and certainly any dividend growth, will largely depend on how things pan out in the coming months.

Balfour Beatty key facts

  • 12 month forward Price/Earnings ratio: 13.7
  • 10 year average Price/book ratio: 12.9
  • Prospective yield: 2.5%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Trading details

The HS2 project means the year end order book is expected to be around £17bn, compared to £14.3bn last year. Despite delays from Covid-19, the group's continued to win new infrastructure projects across all its geographies.

Average monthly net cash is running ahead of forecast, and is now expected to be around £500m. Balfour Beatty has access to £375m in undrawn credit, and no debt repayments until 2023.

The ongoing US Military Housing investigation is "substantially complete", with a resolution expected in the first half of next year.

Looking further ahead, the group expects to report a more normalised operating profit in 2021, which will be broadly in line with 2019. When market conditions become more favourable, Balfour will re-commence its plans to sell parts of its Infrastructure Investments portfolio in 2021.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.