ii view: builder Balfour Beatty shares slump

The impact of the pandemic is still causing this construction company challenges. Buy, sell or hold? 

First-half results to 2 July 2021

• Revenue up 1% to £4.15 billion
• Pre-tax profit of £35 million, up from a loss of £26 million
• Order book down 2% to £16.1 billion
• Net cash up 8% to £625 million
• Interim dividend of 3p per share, from nil in H1 2020 

Chief executive Leo Quinn said:

“We continue to reshape Balfour Beatty to play to its strengths. These include leading capability in markets where governments are committed to long-term infrastructure programmes.  It means choosing to exclude regions and sectors which cannot provide profitable, low risk growth, in favour of those that can.  Our priority is on executing our already strong order book which will drive attractive cash generation and returns.

"Today, we are substantially increasing our interim dividend on the pre-pandemic level and raising margin targets in Support Services."

ii round-up:

Infrastructure builder Balfour Beatty (LSE:BBY) today reported ongoing losses for its UK construction business, hindered by pandemic completion delays and raw material supply disruption.

A £23 million divisional loss came largely because of issues at private sector property projects in central London. Broker UBS had forecast a loss of £13 million. The mainly US and UK construction and support services company will no longer bid for fixed price residential property projects in Capital's centre. 

Balfour shares fell by more than 7% in UK trading, almost halving their year-to-date gain. Shares for fellow infrastructure builder John Laing (LSE:JLG) are up by around a fifth during 2021, while building materials company CRH (LSE:CRH) is up by a similar amount. 

Gains for Balfour’s US construction and support services businesses helped the group return to a first-half pre-tax profit of £35 million, broadly in line with analyst forecasts.  

Contract exits for its support services business from gas and water utility customers injected one-off gains. Adjusted profit rose to £54 million from £10 million in the first half of 2020. US construction profit rebound to £20 million from a prior year £6 million.  

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

Power and rail maintenance contracts at its support services division continued to perform strongly according to management. A robust order book and positive market outlook underpinned an upgrading of support services margin targets from 3% to 5% to 6% to 8%.

An interim dividend payment of 3p per share follows last year's Covid related suspension, and is up from the 2.1p per share interim payment in the pre-pandemic 2019.  

ii view:

Along with both construction and support services, Balfour Beatty also invests in infrastructure projects through its own investment division. With over 110 years of experience in delivering complex infrastructure schemes, it employs around 26,000 people, mainly across the UK and the US, although it also has a small business in Hong Kong.

In 2020, the US generated around 55% of revenue, with the UK accounting for almost all the balance. Construction is its biggest revenue generator at around 80%, with support services accounting for nearly 15% and infrastructure investment the balance. 

More than five years into a transformation programme, Balfour continues to pursue a culture of transparency, risk management and improvement. Cash remains its compass and ultimately the most reliable barometer of financial performance, according to management. Average net cash reached £611 million in this latest half, up from £527 million in H1 2020. 

For investors, difficulties for its UK construction business in London are clearly not welcomed. A US investigation into its mishandling of certain work relating to US military housing is also ongoing. That said, and while some caution looks sensible, full-year guidance for adjusted profit to return to that made in 2019 remains unchanged. Group cash is healthy, and the reinstated interim dividend payment is 43% up on that paid at the half-year in 2019. In all, and given a discounted valuation to rivals, higher risk investors may wish to stay for the longer term. 

Positives: 

• Reinstated interim dividend payment
• Ongoing share buyback programme

Negatives:

• Contingent liability on a legacy London project may cost up to £50 million
• Ongoing US military housing investigation

The average rating of stock market analysts:

‘Buy’