BULL POINTS:
■ Order book up to £13bn
■ Preferred bidder for £5bn-worth of contracts
■ Cash pile, no net debt
■ Can make bolt-on acquisitions
BEAR POINTS:
■ Private sector work will falter
■ Slow down in Dubai
Balfour Beatty provides a welcome break from the gloom dished up by most construction companies. It produced an enviable trading performance last year and promises a resilient effort this year. Despite this, its share price is 34 per cent off its all-time high.
True, at some point the pace of business won from government contracts has to slow, while some parts of the private sector are showing clear signs of weakness. But for now Balfour Beatty is still winning business. At the end of 2008 its order book stood at £12.8bn. That was up from £11.4bn a year earlier and did not include another £4.9bn-worth of contracts for which Balfour was the preferred bidder. Besides, even when the overall construction market does contract, it seems a fairly sure bet that Balfour Beatty will be able to increase its market share, putting itself in a stronger position when a revival comes around.
Certainly, since the beginning of the year, the group has managed to win further work, the latest coming through its US subsidiary, Balfour Beatty Construction, for business worth up to £373m. This includes a part of a joint venture to build a hospital in Dallas, as well as a natural history museum. And a consortium, in which Balfour Beatty holds a 40 per cent stake, has just sorted out the financing for a £6.2bn contract to design, build and operate increased capacity on London's orbital motorway, the M25. The aim is to complete construction in time for the 2012 Olympic Games, while the operating and servicing contract is for 30 years.
Balfour Beatty splits itself into four divisions: building and services; rail; civil engineering; and investments. Growth on the building and services side has been both organic and through acquisitions. The purchase of engineering contractor Dean & Dyball adds to regional coverage in the UK, while the acquisition of construction group Barnhart will provide better opportunities in California's education and construction-management markets. Further business for refurbishment work has been secured in the UK from airports operator BAA, which is a long-standing customer; while a contract has been won to build the London Olympics Aquatics Centre. Work is also continuing on the reconstruction of London's Blackfriars railway station.
| BALFOUR BEATTY (BBY) | ||||
|---|---|---|---|---|
| ORD PRICE: | 340p | MARKET VALUE: | £1.62bn | |
| TOUCH: | 339-340p | 12-MONTH HIGH: | 456 p | LOW: 224p |
| DIVIDEND YIELD: | 4.2% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 180p | NET CASH: | £297m | |
| Year to 31 Dec | Turnover(£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2005 | 4.59 | 124 | 24.9 | 8.1 |
| 2006 | 5.51 | 109 | 21.2 | 9.1 |
| 2007 | 7.49 | 157 | 39.3 | 11.5 |
| 2008 | 9.49 | 270 | 42.9 | 12.8 |
| 2009* | 9.92 | 231 | 34.9 | 14.2 |
| % change | +5 | -14 | -19 | +11 |
Normal market size: 15,000 Matched bargain trading Beta: 0.65 *Numis estimates | ||||
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On the civil engineering side, operating profits rose from £82m to £104m in 2008, with strong activity in all areas, including maintenance and construction work in the water and gas sectors. And Balfour Beatty's solid track record with the National Grid in the UK has helped to secure work in a joint venture with MJ Electric on a programme to upgrade electricity transmission in New England in the US. New civil engineering contracts have also been secured in Canada and New Zealand. However, last year's solid performance in Dubai is unlikely to be repeated as a result of a marked slowdown in spending on infrastructure projects there.
Profits from the rail engineering side were less robust in 2008, but were still up 3 per cent to £41m. However, the pipeline for new work remains strong. In the UK, Balfour Beatty continues work on the new East London line, while the approval of London's Crossrail line will bring significant development opportunities. And work on a number of electrification projects in mainland Europe, as well as new contracts in Australia and New Zealand, means that last year's 33 per cent jump to £1.2bn in the division's order book will be followed by further growth this year.
The investment division, which includes public-private partnerships, is a relatively small part of the group. Even so, it still managed to nearly double profits in 2008 to £31m. Last year it increased its number of concessions from 27 in 2007 to 43 and a further four are at the preferred bidder stage. More opportunities should develop this year, notably in school projects in the UK and in the US to build military housing. Away from work for the public sector, the division has followed up the purchase of a 60 per cent stake in Exeter International airport in 2007 with a 95 per cent stake in Blackpool International airport.
