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Balfour Beatty - profits down, dividend cut

Nicholas Hyett, Equity Analyst | 10 March 2021 | A A A
Balfour Beatty - profits down, dividend cut

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Balfour Beatty plc Ordinary 50p

Sell: 304.40 | Buy: 304.80 | Change 1.00 (0.33%)
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Balfour Beatty's full year underlying revenue rose 3% to £8.6bn, excluding the impact of exchange rates.

After suffering losses in the first half Balfour Beatty has reported full year underlying operating profit of £51m, down from £221m in 2019. The year-end order book rose 14.7% year-on-year to £16.4bn and the group had £581m in net cash.

Balfour Beatty has announced a full year dividend of 1.5p per share, down from 2.1p last year. Going forward the group will aim to pay 40% of underlying after tax profits as a dividend. The group is also increasing its share buyback scheme from £50m to £150m.

The shares were broadly flat following the announcement.

View the latest Balfour Beatty share price and how to deal

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 in 2019 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.

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. Unfortunately, the pandemic means we think it could be a struggle to achieve even these modest levels of profitability any time soon, and such 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. We're now starting to see governments gear up to spend big on infrastructure as the recovery gets underway. 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.

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 market). 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.

Which brings us to the dividend cut. Balfour had been making good progress here and was starting to build a positive record. Alas, the payout has been trimmed after a pandemic. While a dividend cut is never welcome news for investors, we think the caution is warranted given the ongoing uncertainty. If the recovery is as smooth as many hope then we may see dividend growth again in the coming years, but nothing is guaranteed.

Investors should remember Balfour Beatty's fortunes will wax and wane with the wider economy. A government led infrastructure boom will help, but only time will tell how well the group capitalises on this.

Balfour Beatty key facts

  • Price/Earnings ratio: 13.9
  • 10 year average Price/Earnings ratio: 13.0
  • Prospective dividend yield (next 12 months): 2.4%

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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Full Year Results

The Construction Services division reported 2% revenue growth to £7.0bn, largely reflecting strength at Hong Kong business Gammon. Underlying operating profit for the division fell from £125m to £29m.

UK Construction revenue fell 1% to £2.2bn as the pandemic disrupted operations. Despite making a small profit in the second half, the division made a full year underlying operating loss of £26m, compared with a £47m profit last year. This is after paying back £19m received as part of the UK's furlough scheme. The UK Construction order book more than doubled to £6.4bn thanks to a Notice to Proceed at HS2.

US Construction revenue rose 2% at constant exchange rates to £3.8bn as order book growth was mostly offset by COVID disruption. Underlying operating profit fell from £52m to £26m, and the order book fell 17% to £5.2bn as orders slowed in the second half.

Revenue from Gammon rose 10% to £985m and underlying profits rose from £26m to £29m. The order book rose 31% to £2.1bn following important contract wins at Hong Kong Airport.

Support Services revenue rose 4% to £1.1bn thanks to higher volumes at power transmission and distribution, and transportation. Underlying profit from operations fell slightly to £46m, and the order book shrank from £3.2bn to £2.7bn following Balfour Beatty's exit from the gas and water sectors.

Due to unfavourable market conditions Balfour Beatty did not sell any Infrastructure Investments in 2020. Therefore, the division only made underlying profits before tax of £20m thanks to historic military housing incentive fees. The directors value the portfolio at £1.1bn, up 2% on last year.

Find out more about Balfour Beatty shares including how to invest

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.