Balfour Beatty plc (BBY) Ordinary 50p
HL comment (12 August 2020)
Balfour Beatty's underlying first half revenue rose 6% to £4.1bn thanks to a strong performance in US Construction. The group made an underlying loss of £14m, compared with a £72m profit in the same period last year.
Assuming the group's markets recover as anticipated Balfour Beatty expects operating profit to recover through the rest of 2020 and to be in line with 2019 in 2021. The board will look to re-establish the dividend when appropriate.
The shares fell 4.1% in early trading.
Balfour's made some great progress in recent years.
CEO Leo Quinn's Build to Last programme returned the group to something resembling industry standard margins last year and the order book looks increasingly healthy. The next phase of the strategy called for margins to move above industry average as the group made the most of its size and expertise.
Unfortunately with the coronavirus outbreak we think that's very unlikely to be achieved any time soon. And this year could be a real struggle.
Standard 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% would be good going. That leaves little room for error, so we're not surprised the recent disruption has pushed the group into making a loss.
The good news is that many of Balfour's sites have remained open, even if that was a relatively controversial. New working practices have reduced productivity, but at least the business continues to tick over. We expect an infrastructure splurge once the lockdowns are over, as governments look to kick-start the economy. That should provide support for large construction groups in an economic environment that might otherwise be pretty unappealing.
Quinn's more disciplined approach to managing the business also means the balance sheet is in reasonably good shape. There's net cash on the balance sheet, significant liquidity on hand and the cash burn so far has been modest.
However, despite the positives there's need for caution. Construction is cyclical and large construction companies have a worryingly high corporate mortality rate (Carillion being the most recent example to vanish from the stock markets). Countries and companies will emerge from the crisis laden with debt, and with a possible recession looming that's not historically been good news for infrastructure groups.
It's reassuring to see the group taking steps to cut cash costs - even if the dividend suspension is painful and management's 20% pay cut largely aesthetic. Dividends can be made up in the future if things turn out better than expected, but in the current environment we think caution is well advised.
Balfour Beatty key facts
- 12 month forward Price/Earnings ratio: 13.3
- 10 year average 12 month forward Price/Earnings ratio: 12.8
- Prospective yield: 2.3%
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First half results
UK Construction made an underlying loss of £23m, compared with a £17m profit last year, as COVID-19 disrupted activity at multiple sites. US Construction made a £6m profit, down from £19m last year, as Washington State and Florida were hit hardest in Buildings and a number of Civils contract recoveries were reassessed. In June 95% of sites where open across both divisions, compared with 78% in April.
Profits at Gammon, Balfour Beatty's Hong Kong joint venture, fell from £9m to £6m. Operations in the region were among the least affected by COVID-19, which management attributes to the experience with SARS.
Employees in the Support Services business have largely been designated as a key workers, and the division made a £10m profit compared with £18m last year.
Infrastructure Investments have continued as normal in the UK but social distancing has disrupted some operations for the US military. The group did not sell any investments during the half, and pre-disposal profits fell from £9m to £3m.
The order book increased by 20% compared to the start of the year to £17.5bn. This reflects £3bn of contracts related to HS2, $450m of contracts in the US and multiple large contracts in Hong Kong. The group ended the half with £563m in net cash.
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