Interactive Investor

Insider: FTSE 250 chief back buying after results slump

Four months after cutting his stake, the boss of this FTSE 250 construction firm has just returned to the market buying shares at a much cheaper price.

21st August 2023 08:32

by Graeme Evans from interactive investor

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Balfour Beatty (LSE:BBY) boss Leo Quinn has reacted to an 11% results-day slide for the construction company’s shares by spending £175,000 increasing his stake.

The move by Quinn, who has been in post since 2015, was made with the FTSE 250-listed stock trading at its lowest level since November and down 22% on May’s 400p.

Wednesday’s slump came after Balfour reported ongoing caution among US customers, chiefly in the commercial office sector, as they wait for signs of economic stability.

The update clouded another robust set of  results, with half-year profits from operations up 12% to £95 million and guidance unchanged for the rest of the year.

Broker Peel Hunt said it regarded the share price weakness as a buying opportunity and Bank of America reiterated a price target of 460p. Shares closed the week at 313.2p.

Quinn’s purchase of shares in two tranches at around 310p on Wednesday and Thursday was made only four months after he raised £275,000 from the sale of Balfour shares at 373p.

The former boss of Qinetiq and De La Rue, whose remuneration totalled £4.1 million last year, held a Balfour stake worth about £10 million at the end of 2022. When he took over the shares were close to 150p and the company a takeover target for doomed rival Carillion.

He has revived Balfour’s fortunes through a focus on higher-quality, lower risk opportunities and has driven profit in UK construction to within the standard industry 2-3% margin.

About 90% of revenues from the UK division come from public sector and regulated industry clients, with flagship projects including the Hinkley Point C nuclear power station and tunnelling work for HS2 rail in Warwickshire.

UK construction’s half-year profits were 67% higher at £30 million, whereas the equivalent division in the US posted a flat performance at £21 million amid slower activity in some areas. However, prospects are enhanced by the $1.2 trillion Infrastructure Investment & Jobs Act, which is expected to deliver a significant boost in Balfour’s chosen states.

Peel Hunt believes the share price slump may have reflected disappointment that the confident outlook in the UK did not result in increased medium-term margin guidance: “We see no structural reasons not to deliver margins above 3% and closer to listed peers.”

Overall, however, the broker is encouraged by progress and sees no reason to change its 400p target price: “We believe Balfour is in good shape in the sector, demonstrating opportunity and ever improving behaviours.”

Other Balfour operations include a Hong Kong joint venture and support services for critical UK infrastructure, where margins have been at  the upper end of the target 6%-8% range. 

There’s also a £1.3 billion portfolio of infrastructure investments, which when combined with net cash of £710 million exceeds the current stock market value of £1.75 billion.

Bank of America believes the sum-of-the-parts valuation backed by this “solid” portfolio of infrastructure assets is one of several reasons to buy the shares. It also highlights a strong balance sheet and valuation multiples at the low end of Balfour’s historical trading range.

The shares are currently at around 10.5 times 2023 earnings versus the more typical 13 times, with a dividend yield close to 3%. The next shareholder distribution is due on 5 December through the payment of an unchanged 3.5p a share.

Elsewhere in the FTSE 250, two directors at Marshalls (LSE:MSLH) have bought £28,000 of shares in the wake of the landscaping, building and roofing supplier’s big drop in interim profits.

Buyers included chief executive Martyn Coffey, who earlier on Wednesday told investors he is focused on streamlining costs and controlling cash amid expectations that challenging trading conditions will last into next year.

He has seen a material reduction in volumes across all three of the company’s reporting segments, leading to a 26% fall in profits to £33.2 million. However, the performance came as no surprise to the City after a downgrade to guidance two weeks earlier.

Coffey’s priority is to make sure the business is well positioned to deliver a material improvement in profitability when market conditions normalise.

He bought his shares at 248p, with chief financial officer Justin Lockwood doing so at 254p. Share closed the week at 262.6p.

House broker Peel Hunt, which has a 310p target price, said: “Trading conditions are challenging currently for cyclical reasons but we do not see any structural changes occurring in the market.

“The group retains plenty of ability to rebound as and when volumes begin to recover and the operational gearing, which has been so painful in the last 12 months, should flip the other way.”

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