ii view: Builder Balfour Beatty stays focused on returns

Shares down 16% in last six months but consensus market opinion still positive. We assess prospects

Trading update to 8 December

• Year-end order book is expected to be around £15.5 billion, down from H1 £16.1 billion
• Expects 2022 share buyback to be at least £100 million

Chief executive Leo Quinn said:

"The Group is on track to deliver a 2021 performance in line with pre-pandemic levels. 

"Looking to 2022, the Group has a high-quality order book. We are strongly positioned in three geographies where fiscal expansion, green infrastructure growth and, in the US, public private partnerships all play to our unique engineering capability.  We remain confident of capitalising on these factors to drive superior returns."

ii round-up:

Founded in 1909, Balfour Beatty (LSE:BBY) 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.

Group projects have included the UK’s A14 improvement scheme and building the 12.5-mile North Metro Commuter Rail line in Colorado, USA.

For a round-up of this latest trading update, please click here. 

ii view:

Balfour Beatty employs around 26,000 staff. The US generates its biggest slice of revenue at around 55%, with the UK accounting for almost all the balance. Construction is its biggest revenue generator at around 80%, followed by support services at around 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. A retreat in the order book comes as it remains focused on winning work on the right terms and conditions to generate appropriate returns. Cash remains its compass and ultimately the most reliable barometer of financial performance, according to management. Full-year average monthly net cash is expected to be over £650 million compared to £527 million over 2020. 

For investors, an ongoing US investigation into its mishandling of certain work relating to US military housing provides uncertainty. Previously reported difficulties for its UK construction business in London should also not be forgotten.  

But full-year management profit expectations have remained unchanged, with underlying profit from operations for 2021 likely to be in line with 2019 at around £172 million. One of its three London problem projects has now been completed, while the profit margin for its core construction business is expected to rise nearer to 2% during 2022 from an expected 1.2% over 2021. Analysts currently estimate a fair value of 364p a share, although investors wanting that kind of price may require patience.  

Positives: 

• Reinstated interim dividend payment
• Ongoing share buyback programme

Negatives:

• Pandemic related London construction challenges
• Ongoing US military housing investigation

The average rating of stock market analysts:

Buy