Confident Balfour soars on hopes for big shareholder returns
17th August 2022 15:22
by Graeme Evans from interactive investor
Balfour Beatty is in a sweet spot as upgraded guidance and forecasts of big shareholder returns sends its valuation soaring in the FTSE 250.
A favourable market outlook and prospect of “significant future shareholder returns” in 2023 helped Balfour Beatty (LSE:BBY) shares to touch their highest level in several years today.
The positive mood around the FTSE 250-listed stock, which later settled 30.2p higher at 319.4p, was further enhanced by the company’s upgraded full-year guidance for its divisions spanning support services and infrastructure investments.
Bank of America responded by increasing its price target from 380p to 410p and reiterating its “buy” recommendation, which it said reflected the company’s sound execution, the inflation-linked nature of its assets' cash flows and ongoing share buybacks.
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Its analysts said: “While macro risks remain, management commentary and backlog trends provide comfort that demand so far is holding up. Meanwhile, margins have been improving in most segments, suggesting execution is under control, despite cost inflation.”
The latest tranche in Balfour share buyback programme worth £150 million is expected to complete during the year and the company today said it would pay an interim dividend of 3.5p a share on 5 December, representing a 17% increase on a year earlier.
That’s also 67% higher than the corresponding pre-pandemic dividend for 2019, having recently targeted a payout ratio of 40% of underlying profit after tax.
Balfour added: “Given the positive momentum in the business, the transformed portfolio and a favourable market outlook, the board has confidence in its capacity to deliver significant future shareholder returns.”
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The company operates in the UK, US and Hong Kong, with major projects in the UK construction including tunnelling work for the HS2 rail project in Warwickshire and at the Hinkley Point C nuclear power station.
Balfour boss Leo Quinn said: “The need to drive post-pandemic economic recovery has led governments in the group’s three chosen markets to boost spending on infrastructure and sustainability.
“This significant expansion of state-backed infrastructure provides a positive operating landscape for the group.”
Today’s results showed underlying profit from operations rose 42% to £85 million, with UK construction back in profit after last year’s write-downs on central London property projects.
The order book increased 10% to £17.7 billion, while an improved £5.8 billion figure in UK construction is now more than 90% made up of contracts from public sector and regulated industry clients. The US construction order book increased 17% to £6.3 billion as tendering activity returned to pre-pandemic levels.
Support services fell 2% to £2.4 billion but this was more than offset by upgraded guidance for the high end of its 6-8% margin target as Balfour benefits from a shift towards profitable recurring revenues in power, plant, road and rail maintenance.
Growth in the value of Balfour’s infrastructure investments rose from £1.1 billion to £1.3 billion, driven by favourable currency movements and operational performance.
Liberum regards Balfour’s balance sheet strength as a source of competitive advantage, adding that last night’s price/earnings multiple of 9.1 times was “unusually cheap” given the investment portfolio and recovery potential in UK construction.
The broker added: “We believe that Balfour is mislabelled as a UK construction company, when it is more like a US infrastructure fund. Infrastructure assets are benefiting from low real yields in a historical context.”
Peel Hunt increased its forecast for full-year profits from £205 million to £230 million, leading to earnings per share of 30p. It added: “With ever greater certainty in earnings and cash returns, we believe the shares offer defensive value on ten times unchanged 2023 earnings.”
The broker has a target price of 350p, while analysts at UBS have a “buy” recommendation and 375p estimate.
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