Balfour Beatty still busy

Much investor attention focuses on how the UK's new government will tackle its budget deficit and what that will mean for companies with a big exposure to the public sector. Happily for Balfour Beatty, the prospects remain bright, not least because the construction group has a diverse revenue stream. True, few construction companies will be immune to the effects of a cut in spending on the infrastructure, but Balfour Beatty has been busy remodelling its revenue stream towards the non-discretionary end. So, for example, plans for a new motorway may end on the scrap heap, but maintenance spending on existing motorways will not.

What's more, a lot of the group's contracts cover long periods, typically five years or more for some maintenance work. This provides an assured revenue stream and a cushion against the effects of less new work being financed by the government. Balfour's order book, which stood at an impressive £14.1bn at the end of 2009, continues to grow.

The company operates through four divisions: construction, support services, professional services and infrastructure investments. The professional services side provides programme and project management services as well as project design and architectural services. This side was transformed last year by the acquisition of US group Parsons Brinckerhoff, a specialist in project management for large, complex infrastructure developments. This year will see the first full-year contribution since completion of the integration last October, yet the effects are already apparent - the order book for professional services has risen from £400m to £1.4bn.

On the construction side, the group works in the UK, the US, south-east Asia and the Middle East, and operating profits last year rose 24 per cent to £207m. Trading so far this year has remained strong, although business in the US has trailed off a little, albeit against a strong performance last year. But recently there have been some significant contract wins, notably work on a programme to develop terminals at Dallas Fort Worth International Airport.

The support services division operates mainly in the water and power sectors. Last year its revenues were depressed because the old pricing regime operated by the UK's water companies was about to expire. Now a new five-year pricing cycle has just begun and Balfour has won £700m-worth of contracts as water companies step up their capital spending. And, with further work on highway management, last year the division's order book was boosted by 55 per cent to £4.5bn. There has also been solid progress in securing outsourcing work from local authorities.

Meanwhile, the group has grown the infrastructure side of its business significantly, with profits last year up by 35 per cent to £42m. Balfour won four private-finance initiative schemes last year, and has secured further work since then. It is the preferred bidder for a £300m scheme to build schools in Ealing and has the finance for £450m-worth of work for schools in Blackburn. The group is also realising value from existing contracts, selling its holding in the Aberdeen Waste Water concession and reducing its stake in the Edinburgh Royal Infirmary concession, generating cash of £24m in the process.

The group's finances are in decent good shape, too. The acquisition of Parsons Brinkerhoff was funded through a £352m rights issue, while strong cashflow left the group with net cash at the year end of £572m. Despite the steady increase in the dividend, the shares still offer a useful 4.7 per cent yield.