Balfour Beatty plc (BBY) Ordinary 50p
HL comment (12 December 2019)
Full year revenue is now expected to come in around 5% ahead of the previous year, with operating profits slightly ahead of expectations and in line with 2018 thanks to Infrastructure Investment sales.
The order book is expected to finish the year substantially ahead of 2018.
The shares rose 7.4% in early trading.
Four years on and the Build to Last programme is starting to pay dividends.
When CEO Leo Quinn returned to Balfour Beatty to take the top job, he was greeted by a sprawling business where profits played second fiddle to revenues. His turnaround plan has focused on overhauling an inefficient cost base and stopping Balfour bidding for contracts at unsustainable, loss making, margins. The net effect is a smaller, but profitable, business.
While healthier margins have so far offset stuttering revenue growth, Balfour is still operating in a very competitive market place. The refusal to bid below a certain price means it's losing out on some contracts, but that's not stopped the overall order book swelling and the new approach means the pipeline should be more profitable.
For all the good news, Quinn and his team aren't resting on their laurels. The next phase of Build to Last will see margins improved even further. Not content with just making industry standard margins, the group's looking to move ahead of the competition in 2020.
However, the nature of the business does mean there's some need for caution. Construction, and therefore Balfour's fortunes, are closely tied to the ups and downs of the economy - and economic and political uncertainty looms large at home and abroad. To its credit, there's net cash on the balance sheet - more than anticipated in fact - and that should provide some sort of safety net.
All things considered, Balfour has made good progress, but the work's not over yet. The shares offer a prospective yield of 3.4%, which is hardly generous given the risks involved, but should grow if the next leg of the turnaround goes to plan. That's provided the economy behaves itself though, and even then dividends aren't guaranteed.
Third Quarter Trading Update
Full year revenues are expected to reach around £8.2bn, with operating profits of around £205m. The Construction and Support Services business are all expected to achieve industry standard margins this year.
Net cash expectation for the full year have been upgraded to £310m (previous guidance was for £280m-£300m). Balfour Beatty has also refinanced its £375m revolving credit facility, extending the facility out to 2022, although the facility remains undrawn.
Construction Services is expected to achieve margins of 2-3% in the UK year, having completed the troublesome Aberdeen Western Peripheral Route project. US Construction is seeing some margin improvement, while the Hong Kong focused joint venture, Gammon, has not been affected by ongoing civil unrest in the region.
The Support Services business is expected to deliver a similar level of profits as last year, as further margin improvements were offset by lower revenues in utilities.
Balfour Beatty has invested around £60m in new Infrastructure Investments during the year, and disposed of four projects in the second half. All assets were disposed of at or above the Directors' valuation, with gains on disposal of £50m.
Investigations into the possible falsifications of records at Balfour's military housing business are ongoing.
Despite political uncertainties Balfour believe the long term trading environment in its core regions remain favourable.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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