Balfour Beatty (BBY) continues to work towards delivering its 'Build to Last' business transformation programme. A trading statement issued ahead of the release of half-year figures on 12 August highlighted the introduction of new project disciplines and financial controls as part of a £100m cost reduction programme.
| What's new |
|---|
| ■ Further legacy issues uncovered |
| ■ 'Build to Last' transformation gaining traction |
| ■ £200m of net cash expected by the end of the first half |
But an ongoing review of its UK, US and Middle East businesses has identified further legacy issues that will trim profits by an additional £120m-£150m for the full year, with the troubled UK construction business accounting for around two-thirds of this reduction. The transformation of the group's balance sheet has been helped by the sale of US group Parsons Brinckerhoff last year for £234m. As a result of progress so far, net cash is expected to rise to around £200m at the half-year stage. This is an impressive achievement, albeit at the cost of cancelling last year's final dividend.
Group chief executive Leo Quinn admitted that legacy challenges remain. These relate principally to the UK construction arm, where an independent review by KPMG uncovered significant operational deficiencies.
Numis Securities says...
Add. We believe that the better cash profile should be seen as a major tangible positive of management actions to date, and show that it is taking decisive actions this year to provide a strong base for recovery from 2016 onwards. On the latest writedowns, we would not expect these provisions to entail cash outflow, and even if they did, we still expect the group to end the year with a net cash position. This, we believe, will lay the foundations for a solid recovery in 2016, but until all of the legacy issues are identified, we are leaving our forecasts unchanged at 2015 pre-tax profit of £72m and EPS of 9.3p.
Bank of America Merrill Lynch says...
Buy. The negative news on earnings expectations is partly offset by the update on cash, which is expected to exceed £200m in the first half against £219m at the end of 2014, suggesting only negligible cash burn. Cash levels were boosted by £72m of disposals but, even with a £90m cash burn, this equates favourably to up to £300m first-half cash outflows in recent years. Covenants on loans are not at risk, and we believe that any share price weakness allows an opportunity to buy ahead of the turnaround.
