ii view: Balfour Beatty ditches dividend despite HS2 boom

Although HS2 contracts are significant, and most of its sites are open, the 2019 final dividend is lost. 

Covid-19 trading update  

• Order book up 20% from 2019 year-end to £17.4 billion
• Cancelling the 2019 final dividend
• £827 million of liquidity as of late May

Guidance:

Offering no full-year estimates due to Covid-19

Chief executive Leo Quinn said:

"These remain challenging and uncertain times. Our priority will always be the safety and health of all our employees, customers, partners and the public.

"Build to Last has made Balfour Beatty a resilient organisation with a high-quality order book and a strong balance sheet. As we navigate the Group through this exceptional year, we will maintain our focus on the longer term to ensure we are ready to capitalise fully on the significant opportunities in our chosen markets."  

ii round-up:

Infrastructure builder Balfour Beatty (LSE:BBY) had over fourth-fifths, about 83%, of its UK and US construction sites open and operational in May.

Balfour employs around 26,000 staff mainly across the UK, US and Hong Kong. Its order book as of late April had risen to £17.4 billion from £14.3 billion year-end 2019, as confirmation of the UK’s HS2 high-speed railway had enabled it to include £3 billion of related contracts. 

Balfour shares rose by more than 2% in early UK trading, having fallen by less than 3% year-to-date – buoyed by the go ahead of HS2. 

However, given the current pandemic, and with around 17% of those open construction sites suffering significant disruption due to the availability of staff, subcontractors or materials, the board considers it prudent to cancel the 4.3p per share 2019 final dividend payment. 

In the UK, Scotland is its most impacted region given decisions by the devolved government, while in the US, Washington State and Florida have been hit hard. Business in Hong Kong had largely returned to normal. 

In 2019, the US accounted for just under 55% of revenues, the UK just under 44%, and the Rest of the World, including Hong Kong, under 1%. 

Not only does Balfour build infrastructure, it also offers support services and investments which together account generate around a fifth of total sales.

The re-scheduled date for its shareholders Annual General Meeting or AGM is 25 June 2020. 

ii view:

Balfour offers both business and geographical diversity, operating across construction services, support services and infrastructure investments.  

Five years into a transformation programme, management continues to pursue a culture of transparency, risk management and improvement. Cash remains Balfour's compass and ultimately the most reliable barometer of financial performance. Average net cash reached £325 million in 2019, up from £194 million in 2018. 

Now, Covid-19 has seen it cancelling the final dividend. With the UK government its largest customer and Balfour using its job retention scheme, broker UBS argues that this may be as much about it doing the right thing as the need to conserve cash. 

For investors, the scrapping of the final dividend, although not a total surprise, is disappointing. Improving financial metrics had given management confidence to hike the now cancelled dividend by 33%. A US investigation into Balfour's mishandling of certain work relating to US military housing is also ongoing. 

But the boost to the order book from the now confirmed HS2 project is material, while its transformation plan continues to impress. For now, while risks remain, so does group momentum, with higher-risk investors potentially accumulating holdings for the longer term.  

Positives: 

• Order book up 20% from 2019 year-end to £17.4 billion
• 83% of its UK & US construction sites operational in May

Negatives:

• Final 2019 dividend payment cancelled
• US military housing investigation

The average rating of stock market analysts:

Strong buy