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Balfour Beatty - on track to meet full year guidance

Balfour Beatty - on track to meet full year guidance

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Balfour Beatty plc Ordinary 50p

Sell: 254.40 | Buy: 254.80 | Change 4.00 (1.60%)
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Trading so far this year is in line with expectations and the group continues to expect profit growth in 2022.

In the first four months of the year, Balfour Beatty spent £19m repurchasing shares and expects to complete the £150m buyback programme before the end of the year.

Over the past four months, the group's average monthly net cash position rose to around £800m, but this is expected to temper at the full year following the buyback scheme.

Shares fell 1.5% following the announcement.

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Our view

The pandemic is firmly in the rear view mirror for Balfour Beatty, and growth has become the focus.

We're pleased to see margins creeping back up to more normal levels. Even in the good times 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% is good going. Such low margins leave little room for error. That means inflation has the potential to upset progress moving forward.

Some of the group's private sector property projects, which went wrong due to the pandemic, were a drag on profits. No one saw the shutdowns coming, but Balfour's now become a little choosier about its private-sector work. This means the order book's a little leaner, but management is confident that it's of better quality, particularly in the UK where the public sector makes up roughly 90% future orders. Infrastructure spend is a key priority in the US and UK, which should provide support for large construction groups.

All told, we think the direction of travel is a positive one. The pandemic didn't leave behind much scarring on the balance sheet, and the influx of profit this year helped the group improve its net cash position.

That brings us to the dividend.

Having trimmed the pay-out during the pandemic the dividend has since been hiked. The very strong balance sheet will have played a part in that, as did strong demand and margin improvements. The group also upped its buyback scheme by £50m. That will make maintaining lofty dividend payments more affordable moving forward since excess profits will be shared out between a smaller group of investors. Remember, though, that pot could shrink considerably if inflation persists and dividends are variable and not guaranteed.

Investors should remember Balfour Beatty's fortunes will wax and wane with the wider economy. If a government-led infrastructure boom fails to make it through to the bottom line then the dividend will be back on the chopping block. With a valuation some way below the long-term average, the market's aware of these challenges and the risks ahead.

Balfour Beatty key facts

  • Price/Earnings ratio: 9.0
  • 10-Year Average Price/Earnings: 13.4
  • Prospective dividend yield (next 12 months): 4.0%

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 Update

At the end of March, the group's order book was down slightly from the £16.1bn seen in December 2021, to £15.6bn. This reflects management's commitment to disciplined bidding to maintain a high-quality order book.

Despite lingering covid restrictions in Hong Kong, Construction Services is trading in line with expectations and is forecast to post 2-3% margins at the full year. In the US, the group's made progress on the Green Line Extension project and management's guiding for full year margins between 1-2%.

In Support Services, revenue in the power, road and rail maintenance business will come in lower after exiting the gas and water sector. However, it's still expected to achieve its 6-8% margin target. The rail business has signed a four-year agreement with Network Rail worth around £120m.

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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.

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