ii view: Balfour Beatty stays on track

A government focus on infrastructure spending puts this construction company in a confident mood.  

Trading update to 8 December

• Average net cash is expected to be around £500 million for the year
• Order book at year-end expected to be around £17 billion

Chief executive Leo Quinn said:

"As the impact of Covid-19 reduces, we are seeing positive momentum across the business.  Ours is an industry that underpins economies: going forward, it will help to drive recovery, including new jobs, new skills and a greener future.

"We look towards 2021 with a strong order book, a robust balance sheet and having maintained our expert capability. These attributes provide confidence that Balfour Beatty is well positioned to deliver value through profitable managed growth in both the medium and long term."

ii round-up:

Infrastructure builder Balfour Beatty (LSE:BBY) has reported trading in line with forecasts, although stronger than expected cash now underpin both the restarting of the dividend payment and launch of a share buy-back programme. 

Average net cash is expected to be around £500 million for the year, up from a previous range between £430 million to £460 million, aiding the payment of a final dividend for 2020 and allowing the launch of a £50 million share buy-back programme. 

Balfour shares rose by around 1% in UK trading, leaving its gain since late March lows to over a third. Shares for building materials company Ibstock (LSE:IBST) are up by a similar amount, while shares for sector heavyweight CRH (LSE:CRH) are up by over 70%.

As previously announced, Balfour’s order book is expected to be up by around a fifth come the year end to about £17 billion, fuelled partly by the prior winning of a contract for high-speed railway HS2. Other contracts feeding into the mix include work on the three-runway project for Hong Kong’s airport, and smart motorway alliance contracts for the UK’s M25 and M3. 

Balfour highlighted new, low carbon infrastructure such as HS2, wind power, new nuclear, rail electrification and energy efficient buildings as important focuses for a UK government looking to push recovery in the wake of the pandemic. It recently detailed infrastructure capital spending of £100 billion for 2021. 

Full details of Balfour's sustainable dividend policy, future capital returns programme and optimal balance sheet structure are expected to be outlined at its March 2021 results. 

ii view:

Balfour employs around 26,000 staff, mainly across the UK, US and Hong Kong. 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 construct infrastructure, but it also offers support services and investments which together generate around a fifth of total sales.

Several 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. Expected average 2020 net cash of £500 million is up from £325 million in 2019 and £194 million in 2018. 

For investors, further potential Covid disruption cannot be ignored. It caused an underlying loss from operations of £14 million at the half-year results. A US investigation into its mishandling of certain work relating to US military housing is also ongoing. Management hopes for a resolution in the first half of 2021. 

But the boost to the order book from the now confirmed HS2 project is material. And Balfour's transformation plan continues to impress. For now, and with group momentum appearing to be ongoing if excluding Covid-19 disruption, higher risk investors may want exposure to Balfour for the longer term.  

Positives: 

• Order book up around a fifth
• Planning a final 2020 dividend payment

Negatives:

• Possibility of further Covid-19 disruption
• US military housing investigation

The average rating of stock market analysts:

Strong buy