Why Galliford Try could be worth 25% more than this

Galliford Try Holdings (LSE:GFRD) shares today hit a post-2020 high as upgraded guidance and a big dividend hike fuelled the momentum seen since a switch out of housebuilding.

The FTSE All-Share construction and infrastructure specialist is now focused on health, education, defence, custodial, highways and environment projects, with 87% of its £3.7 billion order book from clients in the regulated and public sectors.

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It offloaded its Linden Homes and Partnerships operations to Vistry Group (LSE:VTY) at the start of 2020, a move that created a newly listed stock under the Galliford Try Holdings name.

The shares today set their highest level since the overhaul at 220p, aided by the announcement of a new annual dividend policy of 1.8 times earnings cover.

This means shareholders can expect the 8 December payment of 7.5p a share, leaving the total for the financial year 31% higher at 10.5p. They are also in line to get a previously announced special dividend of 12p a share, which is due for distribution on 27 October.

Galliford said the improved dividend policy reflected its confidence in the outlook, as well as the low-risk nature of its PPP (Public-private partnerships) asset portfolio. On top of the special dividend, Galliford is about 90% through plans to buy back £15 million of its shares.

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The optimism follows strong results for the year to 30 June, with a 12.6% rise in revenues to £1.4 billion and underlying profits 23% higher at £23.4 million.

Demand from the water industry helped Infrastructure revenues up by 34%, while the Building division rose 1% despite being held back by some client procurement delays in response to rising inflation.

Significant contract wins have included a £95 million new custodial facility at HMP Rye Hill and May’s £387 million of refurbishment and new-build work at RAF bases. The operating margin across both divisions stood at 2.4%, in line with a target to reach 3% by 2026.

Chief executive Bill Hocking said momentum in the business has carried into the new financial year, prompting it to forecast 2024 underlying profits at the upper end of the City’s £24 million-£28 million range.

He said: “We are doing what we said we would do, consistently delivering increased revenue and profit, supported by our great people, a strong balance sheet, excellent order book and good supply chain and client relationships.”

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Peel Hunt said shares have responded well to the pace of progress but that they were still “excellent value” on a multiple of 10 times projected earnings. It has a price target of 280p.

Counterparts at Liberum are at 270p, noting that its sum-of-the parts assessment values Galliford’s investments at 42p a share and 2024’s average net cash at 154p.

The City firm concludes: “The market is attributing no value to the Building and Infrastructure businesses, which is unjustified given management has returned the business to profitability while implementing a strict low-risk strategy.”