ii view: Balfour Beatty shares attack 15-year high after this update

Management at this FTSE 250 construction company have been de-risking operations with new contract wins this year. We assess prospects. 

Trading update from 1 January to 11 May

ii round-up:

Construction and support services company Balfour Beatty (LSE:BBY) today detailed trading year-to-date which is in line with management’s prior expectations. 

Profit for the full-year is expected to be flat compared to 2022, with the order book as of end of March standing at £17 billion compared to £17.4 billion at the end of December. 

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Shares in the FTSE 250 company were little changed in UK trading having come into this latest news up 16% year-to-date. That’s similar to building materials giant CRH (LSE:CRH) and comfortably ahead of a near 1% advance for the 250 index itself during 2023. Balfour shares are now within a whisker of the 15-year high set earlier this week.

Operating largely in the UK and US, Balfour contracts won year-to-date include a £297 million seven-year East Sussex road maintenance contract and a $230 million (£185 million) deal to build datacentres in the Northwest of the USA. 

Balfour has in recent year been pursuing a transformation programme. Bidding for contracts is now more selective, with fixed price contracts for construction being reduced in order to give management increased flexibility.

Group average net cash, now a core management health indicator, came in at £740 million compared to £804 million over 2022, pushed lower by an expected working capital outflow of around £100 million and share buybacks.

Balfour continues to expect a working capital outflow of between £75 million and £125 million for the full year, with half of its £150 million share buyback programme completed to date. 

Broker UBS reiterated its ‘buy’ rating on the shares post the update, flagging an estimated fair value target price of 435p per share. Interim results are scheduled for 17 August. 

ii view:

Founded in 1909, Balfour today operates mainly in the infrastructure and non-residential construction segments as well sometimes investing in infrastructure projects such as US military housing. Construction generates most of its revenues with support services coming in at around a tenth and investments a further 3%. Geographically, sales are split relatively evenly between the UK and the US, with a small balance generated largely in Hong Kong. 

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For investors, raised borrowing costs and a still highly uncertain economic outlook should not be forgotten. Stretched government finances following both the pandemic and a consumer energy crisis may leave politicians less inclined to invest in infrastructure. Specific contractor risks always persist, costs for businesses generally remain elevated, while infrastructure investments can prove challenging to sell. 

On the upside, diversity of both operations and geographical regions is enjoyed. Management’s transformation programme continues, the robust order book offers good visibility, while a focus on shareholder returns remains, with the shares on a forecast dividend yield of close to 3%. 

For now, and while scope for caution remains, de-risking and diversification provide grounds for investors to stick with Balfour unless the story changes.  

Positives: 

• Continued transformation programme
• Focus on shareholder returns

Negatives:

• Rising costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy