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Balfour Beatty - profits soar as UK Construction rebounds

In the first half, underlying revenue was down 4%, when excluding the impact of exchange rates, to ?4.1bn.

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In the first half, underlying revenue was down 4%, when excluding the impact of exchange rates, to £4.1bn. An increase at Construction Services was offset by the expected decrease at Support Services.

A return to profitability for UK Construction helped underlying operating profit rise 42% for the wider business, to £85m.

Full year guidance for Support Services has been upgraded, with industry standard margin now expected at the top end of the previous 6-8% range. Profit from investment disposals is now expected to be in the range of £55 to £65 million.

The board have recommended a 3.5p dividend, a 17% from last year. The latest tranche in the multi-year share buyback programme, of £150 million for 2022, is underway and expected to complete during the year.

The shares rose 8.6% following the announcement.

View the latest Balfour Beatty share price and how to deal

Our view

First half performance was dominated by the return to profitability of the UK Construction segment which had been hit hard by the pandemic. Though it was more than simply a recovery, profit managed to end up slightly ahead of pre pandemic levels.

We're 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, which should provide support for large construction groups.

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.

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, with £150m planned over 2022. 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, 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. The valuations have come back up somewhat this year, as operating performance improved, but with a valuation some way below the long-term average, markets are still pricing in challenges 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.

Half Year Results

Construction Services underlying revenue at £3.4bn was up 2%, driven by exchange rate movements in the US and Hong Kong. Ignoring those movements, revenue fell 2%. Underlying operating profit rose to £49 million (2021: £6m), as UK Construction returned to profitability, whilst US Construction and Gammon were both slightly ahead of the prior period. The order book increased 12% over the period to £15.3bn, as both the US and Gammon won significant contracts in the period.

Support Services revenue decreased by 10% to £499m, as higher volumes at power were more than offset by a reduction in gas and water following the group's decision to withdraw from the sector. Underlying profit from operations was down at £36m (2021: £54m), though the prior year benefited from around £20m in one-off items. The order book decreased 2% in the period to £2.4bn.

Balfour's Infrastructure Investments business reported pre-disposals operating profit of £10 million (2021: £8 million), as a result of higher returns on projects as income increases with inflation. There was a £7m gain on the disposal of a 319-unit multifamily housing project in Houston, Texas. That took underlying operating profit £2m higher, to £17m. The Directors' valuation of the portfolio increased to £1.3bn (FY 2021: £1.1 bn).

The group's average net cash rose £200m to £811m, compared to last year. Free cash flow of £6m was down from £141m the prior year, largely due to an expected working capital outflow.

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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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th August 2022