More progress for this mid-cap pair

Two FTSE 250 stocks rewarded investors for their patience today as half-year results revealed encouraging signs of progress. Graeme Evans reports.

The revival in fortunes seen at Balfour Beatty and Hikma Pharmaceuticals gathered pace today as the FTSE 250 Index pair produced half-year results in keeping with growing investor optimism.

Both recorded significant trading milestones, with Balfour delivering on margin targets and Hikma reversing a recent run of downgrades for its generics business. Shares were 4% and 7% higher respectively.

At Balfour, the strategy of CEO Leo Quinn continues to pay off as he said all businesses were either achieving industry standard margins or on track to do so in the second half - meeting the target he set in 2016. His confidence in prospects was underlined by a 33% rise in the interim dividend to 1.6p.

With the aim now to exceed industry standard margins from next year, UBS said the company was "on track to crystallise its full potential". The broker has a target price of 330p, based on a 2018 price earnings multiple of 14.5x.

Breaching the 300p mark has proved to be a barrier for shares, with the FTSE 250 stock only briefly above this level in June before falling back.

Having launched the group’s Build to Last transformation programme in early 2015, Quinn has focused the company onto its core capabilities. This has meant exiting the Middle East market and being more selective about bidding for work.

It's been far from plain sailing however, with the UK construction arm taking a £15 million hit in today's results to cover work on the £550 million Aberdeen Western Peripheral Route. Following the collapse of Carillion, Balfour and Galliford Try became jointly liable to deliver the troubled contract.

This resulted in a profit margin of 0.5% for UK construction, although when excluding the Aberdeen project the figure rose to 2.1%, which is within the 2% to 3% industry-standard target range.

At the start of 2015, Balfour identified 89 historical contracts in the UK with a material negative impact on profitability and cash. Only five contracts now remain and two of these are expected to reach completion in 2018. 

The UK order book remained constant at £2.7 billion in the half year, with the business now using increased bid margin thresholds when tendering.

It also continues to pursue a number of key infrastructure opportunities such as HS2, new nuclear power stations at Hinkley Point C and Wylfa, smart motorways for Highways England and the third runway at Heathrow airport.

Hikma also appears to be moving in the right direction after raising its full-year guidance for its division producing generic versions of drugs.

This is a significant breakthrough for Hikma following a long period in which it had to downgrade forecasts for the generics division due to the impact of price erosion in the United States. The company also raised guidance for its injectables division, which makes hospital products used in critical care.

Hikma's third operating division, which sells branded drug products across the Middle East and North Africa, continues to perform well.

Brian White, healthcare research analyst at Cantor Fitzgerald, said the company was “moving in the right direction” but warned that near-term pressures remain. He has placed his price target under review, having seen shares rally from their five-year low of under 900p in February to almost 1800p today.

The start of the weaker trading conditions in generics coincided with Hikma's 2015 transformational deal to buy Ohio-based Roxane Laboratories. At the time Hikma said Roxane represented a “scarce asset” which would be difficult for it to replicate on the same scale and to the same level of quality.

There have been other frustrations for Hikma, not least its battle to secure regulatory approval for a generic version of GlaxoSmithKline asthma and lung drug Advair.

White is now forecasting a return to double-digit operating margins in generics by 2020, although longer term he suspects that management will have "more expansive plans for the division" beyond reducing the cost base and waiting for a substitutable Advair generic.