Balfour Beatty's first-half revenue rose 6% to £4.5bn, ignoring the impact of exchange rates. This was largely driven by the UK Construction division as HS2 volumes increased.
Underlying operating profit fell 6% to £80m as improved profitability in UK Construction was more than offset by declines in Support Services and infrastructure investments.
The net cash position fell from £742m to £710m. Free cash flow increased from £9m to £19m.
Balfour reiterated its expectation that full-year underlying operating profits from its Construction and Services businesses will be in line with 2022 levels.
The group completed £87m worth of share buybacks in the first half, with the rest of the £150m expected to be completed by year-end. An interim dividend of 3.5p per share was announced, in line with last year.
The shares rose 2.1% following the announcement.
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It's been a robust start to the year for infrastructure giant Balfour Beatty. The UK Construction business was the star performer, with increased HS2-related activity helping to drive the division's revenues and profitability higher. Gammon, the group's 50/50 joint venture based in Hong Kong, saw revenues and profits grow at double-digit rates too, as activity in this region also stepped up.
While we can't knock progress, even in the good times margins in the construction sector are pitifully thin. That's why we were pleased to see the operating profit margin creep back up towards 2%. Such low margins leave little room for error.
Selecting longer contracts where the group has expert knowledge reduces risk and increases earnings visibility (more on that later). Balfour's also choosier about its private-sector work than it has been in the past. That's particularly true in the UK, where the public sector makes up over 95% of future orders - meaning revenues are more likely to hold up in an economic downturn.
And while infrastructure spend remains a key priority in the US and UK, the current high-interest rate environment is causing delays in some projects going to contract, mainly in the US, as customers wait for economic stability. That's driven a small decline in the order book over the first half. But the order book's still sitting at a hefty £16.4bn, which gives plenty of visibility in the short to medium term.
Profits from infrastructure investments have dipped, largely due to increased compliance monitoring costs and a lack of disposals. But there's set to be £15-30m worth of disposals in the second half, which should help to soften the blow of rising costs.
And in both the UK and the US, Balfour's investment portfolios are positively linked to inflation. In recent years it's benefitted from climbing rates, but with that trend reversing in the US, the valuation's suffered. The Bank of England expects inflation to continue falling on this side of the pond too, so there's set to be more pain and potentially lower profits on this front.
The net cash position crept lower in the first half. Given there's plenty of competition for the group's cash resources, including a pledge to continue buying back shares, we'd like to see cash generation improve from current levels to help underpin the buybacks. Remember, there's no guarantee of investor returns.
If a government-led infrastructure boom fails to make it through to the bottom line, then shareholder returns will likely be back on the chopping block. This uncertainty is reflected in Balfour still trading below its longer-term average on a price/earnings basis.
Balfour Beatty key facts
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