ii view: Balfour Beatty nears record high after US contract win
A trusted track record and benefitting from energy transition projects and infrastructure upgrades. We assess prospects for this FTSE 250 company.
5th November 2024 16:17
by Keith Bowman from interactive investor
US Contract win
Chief executive Leo Quinn said:
“This latest contract award demonstrates our leading civil engineering capabilities and is testament to our 30-year history of delivering projects for the Texas Department of Transportation.”
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ii round-up:
Construction firm Balfour Beatty (LSE:BBY) today announced a sizeable contract to rebuild part of a major US highway in Austin, Texas.
The project, awarded for $746 million (£575 million), will see Balfour reconstruct a four-kilometre section of interstate to the south of Austin which upon completion will provide eight general purpose lanes, a major new intersection and multiple upgraded access roads.
Shares in the FTSE 250 company rose 1% in UK trading having come into this latest news up by close to a third year-to-date. That’s similar to fellow construction company Kier Group (LSE:KIE) and comfortably ahead of a near 5% improvement for the FTSE 250 index in 2024. Balfour shares had traded less than 4% from a record high during Tuesday's session.
Balfour Beatty construction projects include the UK’s Hinkley Point nuclear plant, works for power groups National Grid (LSE:NG.) and SSE (LSE:SSE), construction at Los Angeles airport, as well as other UK and US road building developments.
This latest road contract also includes the build of a new bridge across the 416-acre Lady Bird Lake on the Colorado River, and replacing the existing bridge built in 1956.
Main construction is likely to start in the first half of 2025 and complete in 2033. The project is expected to significantly improve connectivity and capacity for the 200,000 drivers who regularly use the road.
Balfour is scheduled to release a trading update on 5 December.
ii view:
Started in 1909, Balfour today employs around 26,000 people. Revenues are split relatively evenly between the UK and US at just over two-fifths each, with the balance mostly generated by a 50:50 partnership with conglomerate Jardine Matheson in Hong Kong. Construction accounted for most of its 2023 sales at 84%, followed by support services at 12%, and infrastructure investments the balance.
For investors, the tough economic backdrop including elevated borrowing costs cannot be overlooked. The outcome of the US election could see infrastructure spending reassessed. Costs generally for businesses remain elevated, while construction projects taken on at fixed prices always offer a degree of cost overrun risk.
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To the upside, an order book of £16.6 billion as of late June offers some future visibility. Diversity of both operations and geographical regions exists. Previous management initiatives have looked to lower risks including reducing fixed price contracts where possible, while a focus on shareholder returns sees the shares trade on a forecast dividend yield of close to 3%.
In all, and while the success or failure of Balfour’s own infrastructure investments can impact overall profits, a consensus analyst estimate of fair value above 460p per share looks to offer grounds for 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
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