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Balfour Beatty - buybacks to continue into 2023

Balfour Beatty's full year revenue is expected to be around 5% ahead of last year, which came in at 8.3bn pounds.

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Balfour Beatty's full year revenue is expected to be around 5% ahead of last year, which came in at £8.3bn. That was largely driven by positive changes in exchange rates.

The year-end order book is also expected to be around 5% ahead of the prior year's figure of £16.1bn. Again, that increase is largely driven by changes in exchange rates.

Balfour now expects profit to be ahead of market expectations, due to positive net interest income and certain accounting measures which will significantly reduce the 2022 tax charge. Average monthly net cash is now forecast to be around £800m, ahead of the previous guidance of £740-£780m.

Over £200m has been returned to investors over 2022, with the current buyback scheme set to complete in December. For 2023, distributions are expected to be broadly similar. From January, the group expects to continue buying back shares ahead of confirming a new buyback scheme with full year results in March.

The shares rose 2.2% following the announcement.

View the latest Balfour Beatty share price and how to deal

Our view

Balfour Beatty looks to be heading into the final stretch of the 2022 financial year in decent shape. Recent performance looks to be following the same trend as the first half, where we saw the return of profitability in the UK Construction segment which now looks to be back on solid ground - of course there's no guarantees.

We've been pleased to see margins creeping back up to more normal levels too. 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.

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. That's particularly true in the UK, where the public sector makes up roughly 90% future orders.

Selecting contracts where the group has expert knowledge along with longer contracts reduces risk, and the order books now growing with higher quality. Infrastructure spend is a key priority in the US and UK, and there was some positive news out of the UK in November. The government renewed its commitment to infrastructure investment, which should provide demand for large construction groups like Balfour.

Low margins mean inflation has the potential to upset progress moving forward. But while construction and support services need to mitigate the impacts, the investment portfolio is a benefactor. Both the UK and US portfolios are positively linked to inflation, which helps the wider group offset the challenges in other areas.

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 again improve its net cash position.

Those strengths are likely behind the pledge to continue buying back shares into 2023. That's a clear signal from management that it believes the shares offer value, of course there's no guarantee.

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 shareholder returns will be back on the chopping block.

The valuation's pushed higher in recent months, a result of the positive news from the UK government and we're supportive of the rise. But the group still trades below its longer-term average, a sign of the uncertainty that lies ahead.

Balfour Beatty key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Article history
Published: 8th December 2022