ii view: Balfour Beatty bullish as progresses major projects

AGM trading update from 1 January to date

• Average net cash held of £756 million, up from £700 million in 2023

ii round-up:

Construction and support services company Balfour Beatty (LSE:BBY) today maintained its estimate for growth in annual profit, with progress made across three major projects. 

Average monthly closing net cash for the first four months of 2024 was £756 million, a key management health indicator and up from £700 million last year. Around half its previously announced £100 million share buyback has now been completed.  

Shares in the FTSE 250 company, which are still within sight of an 18-year high, rose 1% in UK trading having come into this latest news up around 15% year-to-date. That’s behind a one-third gain for smaller construction rival Kier Group (LSE:KIE) although ahead of a 3% rise for paving stone supplier Marshalls (LSE:MSLH). The FTSE 250 index is up 5% year-to-date. 

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Balfour Beatty's construction projects include the Hinkley Point nuclear plant and the HS2 railway project along with various support service road maintenance contracts.

Progress on projects so far this year includes early contractor works on nine electricity transmission projects for Scottish and Southern Electricity Networks (SSEN) under its accelerated strategic transmission investments. 

Balfour is also progressing the next phase of BP (LSE:BP.) and Equinor's net zero Teeside power project including carbon capture. It's also been selected as a construction partner for Rolls-Royce Holdings (LSE:RR.) and its defence plant expansion to build reactor components for nuclear submarines in Derby. 

The City estimates that the three projects could result in £3-£4 billion of orders. Broker UBS reiterated its ‘buy’ rating on Balfour shares post the update.

First-half results are scheduled for 14 August. 

ii view:

Started in 1909, Balfour today employs around 26,000 people. Headquartered in London, it operates mainly in the infrastructure and non-residential construction segments as well sometimes investing in infrastructure projects such as US military housing. Construction accounted for 84% of its revenues during 2023, followed by support services at 12% and infrastructure investments the balance. Geographically, sales are split relatively evenly between the UK and the US at just over two-fifths each, with the balance generated largely by its 50:50 partnership with conglomerate Jardine Matheson in Hong Kong. 

For investors, elevated borrowing costs and ongoing uncertainty about the timing of interest rate cuts both in the UK and US, should not be overlooked. Customers such as BP and Rolls Royce will be looking to squeeze costs wherever possible, political elections in the UK and US raise uncertainty regarding future spending, while those construction projects taken on at a fixed cost always offer a degree of cost overrun risk.   

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On the plus side, diversity of both operations and geographical regions exists. Previous management initiatives have looked to lower risks, including reducing fixed price contracts where possible. An order book of £16.5 billion as of its 2023 year-end offers good future visibility, while a focus on shareholder returns remains, with the shares on a forecast dividend yield of around 3%. 

On balance, and while the impact of investment performance on its profits needs to be remembered, a consensus analyst estimate of fair value above 435p per share looks to provide grounds for cautious optimism.

Positives: 

• A focus on lower risk contracts
• Increasing shareholder returns

Negatives:

• Elevated costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy