ii view: new government boosts confidence at Balfour Beatty

First-half results to 28 June

• Revenue up 3% to £4.7 billion
• Adjusted profit down 4% to £77 million
• Order book up £0.2 billion to £16.6 billion
• Interim dividend up 9% to 3.8p per share
• Average net cash held of £735 million, up from £695 million in H1 2023

Chief executive Leo Quinn said:

"The outlook for the Group's chosen growth markets, where we hold unique capabilities in delivering complex infrastructure projects, remains encouraging, including in the UK with the new Government reinforcing commitments to critical national infrastructure. 

“Balfour Beatty's prospects across these markets provide the Board with confidence that the Group will continue to deliver significant and attractive shareholder returns in the coming years."

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ii round-up:

Building firm Balfour Beatty (LSE:BBY) today detailed a gain in profits for construction and support services, countered by losses from infrastructure investments. 

Half-year profit growth of 3% and 7% for construction and support services respectively were hindered by a £7 million loss on infrastructure. That left overall profit down 4% year-over-year at £77 million. The City had forecast a £9 million gain on infrastructure investments. 

Shares in the FTSE 250 company fell 4% in UK trading having come into these latest results up around 22% year-to-date. That’s similar to paving stone supplier Marshalls (LSE:MSLH) and ahead of a 7% improvement for the FTSE 250 index in 2024. 

Balfour Beatty construction projects include the Hinkley Point nuclear plant, continued HS2 railway works around Birmingham and various road maintenance contracts including the M25.

Sizeable new works initiated over the half-year include those for customer Scottish and Southern Electricity Networks (SSEN) under its accelerated strategic transmission investments, as well as works for National Grid (LSE:NG.), BP (LSE:BP.) and Rolls-Royce Holdings (LSE:RR.).

Balfour’s half-year order book of £16.6 billion is up marginally from £16.4 billion a year ago.

Average net cash for the first half, now a core management health indicator, increased to £735 million from £695 million in H1 2023. An interim dividend of 3.8p per share is up from 3.5p last year. 

Broker UBS reiterated its ‘buy’ rating on the shares post the results. A further trading update is scheduled for 5 December. 

ii view:

Founded in 1909, Balfour today operates across the UK, US and Hong Kong. It largely focuses on UK energy transition and security projects, UK transport works, as well as UK defence and US buildings projects. Sales are split relatively evenly between the UK and US at just over two-fifths each, with the balance mostly generated by its 50:50 partnership with conglomerate Jardine Matheson in Hong Kong. Construction accounted for most revenue in 2023 at 84%, with support services 12% and infrastructure investments the balance.

For investors, the tough economic backdrop including elevated borrowing costs cannot be overlooked. A pending political election in the US could see infrastructure spending there reassessed. Costs generally for businesses remain heightened, while those construction projects taken on at a fixed price always offer a degree of cost overrun risk.   

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On the plus side, diversity of both operations and geographical regions exists. Previous management initiatives have looked to lower risks including reducing fixed price contracts where possible. An order book of £16.6 billion offers future visibility, while a focus on shareholder returns remains, with the shares on a forecast dividend yield of around 3%. 

For now, and while the impact of investment performance on its profits cannot be overlooked, a consensus analyst fair value estimate above 440p per share appears to gives reason for continued long-term optimism.

Positives: 

• A focus on lower risk contracts
• Increasing shareholder returns

Negatives:

• Elevated costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy