ii view: Balfour Beatty shares tumble

First-half results to 30 June

• Revenue up 9% to £4.5 billion
• Profit down 6% to £80 million
• Order book down 6% from the start of the year to £16.4 billion
• Interim dividend unchanged at 3.5p per share

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Chief executive Leo Quinn said: “We continue to deliver from the scale and breadth of our lower-risk order book, which, during this period of high inflation and interest rates, underpins the financial results reported today and our expectations for the full year.

“Looking beyond 2023, we have positioned Balfour Beatty strongly with unique capabilities and a sector-leading balance sheet, to capitalise on national plans to transform critical infrastructure, particularly in the energy and transport markets. This provides the board with confidence in both profitable managed growth and in our capacity to deliver significant future shareholder returns.”

ii round-up:

Construction and support services company Balfour Beatty (LSE:BBY) today flagged customer caution in relation to its US commercial office-building business as it continued to point towards expected profit growth come the second half of next year. 

First-half profits proved broadly in line with City expectations falling 6% year-over-year to £80 million, largely due to the timing of disposals and lower infrastructure investment profits.

Shares for the FTSE 250 company fell by more than 6% in UK trading having come into this latest news up by around a fifth over the last year. That’s similar to shares of Severfield (LSE:SFR) and Galliford Try (LSE:GFRD). The FTSE 250 index itself is down by 8% over that time. 

Operating largely in the UK and US, Balfour’s order book fell to £16.4 billion at the end of June, down from £17.4 billion at the start of the year, given both US commercial customers delaying contracts against the backdrop of economic uncertainty and completed works in the UK. 

Profits excluding its infrastructure investments are still expected to prove similar to those made in 2022, with medium-term performance potentially aided by the connection of UK green energy projects to the national grid. 

Existing works in relation to the Hinkley Point nuclear plant and the HS2 railway build continue to progress, while demand for hospitality and aviation-related projects in the US persists. 

Broker UBS reiterated its ‘buy’ rating on the shares after the results. The group’s next trading update is scheduled for 14 December. 

ii view:

Started in 1909, Balfour today operates mainly in the infrastructure and non-residential construction segments as well sometimes investing in infrastructure projects such as US military housing. Construction generates most of its revenues with support services coming in at around a 10th and investments a further 3%. Geographically, sales are split relatively evenly between the UK and the US with a small balance generated largely in Hong Kong. 

For investors, raised interest rates fuelling economic outlook uncertainty has heightened caution for many of its US commercial customers. Stretched government finances following both the pandemic and a consumer energy crisis may leave politicians less inclined to invest in infrastructure. Specific contractor risks always persist, while costs generally for businesses remain elevated.  

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More favourably, diversity of both operations and geographical regions is enjoyed. Previous management initiatives have looked to lower risks including reducing fixed-price contracts, the order book remains robust offering some future visibility, while a focus on shareholder returns remains with the shares sat on a historic and estimated future dividend yield of over 3%. 

In all, and while commercial customers should not be ignored, an analyst consensus estimate of fair value at over 400p per share looks to offer grounds for cautious longer-term optimism. 

Positives: 

• De-risked order book
• Focus on shareholder returns

Negatives:

• Elevated costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy