Interactive Investor

ii view: Balfour Beatty rebuilds after the pandemic

10th March 2022 12:07

Keith Bowman from interactive investor

A dividend yield approaching 4% and a £150 million share buyback programme announced. Buy, sell, or hold?

Full-year results to 31 December 2021

  • Revenue down 4% to £8.26 billion
  • Adjusted profit from operations up 141% to £181 million
  • Order book down 2% to £16.1 billion
  • Final dividend of 6p per share
  • Total dividend for the year of 9p per share (2020: 1.5p per share) 

Chief executive Leo Quinn said:

"In 2021, despite the challenges presented by Covid-19, we have delivered operating profits ahead of expectations.

"With a transformed portfolio focused on favourable infrastructure markets across our chosen geographies and our sector leading balance sheet, we are confident of delivering significant future returns to shareholders."

ii round-up:

Infrastructure builder Balfour Beatty (LSE:BBY) today reported a rise in profit as it continued to recover from pandemic hindered completion delays during 2020. 

Profit from construction and support services, and excluding its own infrastructure investments, rose to £181 million from £75 million in 2020. That’s ahead of 2019’s pre-pandemic £172 million. Average net cash, a core management health metric, rose to £671 million compared to £527 million in 2020, underpinning both a 6p per share final dividend and a £150 million share buyback programme. 

Balfour shares rose by more than 2% in UK trading having fallen by around 10% year-to-date. Shares for building materials and paving specialist Marshalls (LSE:MSLH) are down by a similar amount, while sector giant CRH (LSE:CRH) has fallen by around 17%. 

A recovery for Balfour’s US business helped lead a near tripling in profit for its overall construction services business to £79 million. The UK construction business returned to profit in the second half following issues at private sector property projects in Central London during the first half. 

Group construction projects include HS2 rail, Hinkley Point nuclear power station and London’s Crossrail. US projects include the Microsoft Redmond Campus in Washington and the IH-635 highway project in Texas.

Profit for Balfour’s support services business more than doubled to £102 million, helped by an exit from the gas and water sectors and performance improvements across its power, road and rail maintenance services.  

Profits including those from disposals for its infrastructure investment division totalled £49 million over the year. 

Accompanying management outlook comments pointed to expectations for further profit growth during 2022 for both its construction and support services businesses.

ii view:

Balfour Beatty is today a construction and support services company which also sometimes invests in infrastructure projects. It operates largely in the US and UK, with a small operation in Hong Kong. Founded in 1909, today it employs around 26,000 personnel. 

Balfour has over recent years been pursuing a transformation programme. Bidding for contracts has become more selective and moves to reduce risk have been made. Fixed price contracts for UK construction as at year-end were 14% of the order book compared to 50% in 2018, giving it increased flexibility.  

For investors, an uncertain economic outlook and expected interest rate rises warrants consideration. Supply challenges for industry generally need to be remembered, as does the likely rising cost of many materials given elevated commodity prices.  

More favourably, Balfour enjoys diversity of both operations and geographical locations. Net cash held, a core management indicator, also continues to improve, while the shares now sit on a historic and estimated future dividend yield approaching 4%. In all, and with the consensus analyst estimate of fair value currently standing at over 350p per share, there is scope for optimism longer term. 

Positives: 

  • Continued transformation programme
  • Relatively attractive dividend yield (not guaranteed)

Negatives:

  • Potential for rising material costs
  • Uncertain economic outlook

The average rating of stock market analysts:

Buy

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