Galliford Try set to build on profits

Construction company Galliford Try (GFRD) offered plenty of good news for its investors in its half-year results. Its order book ticked up to £3.5bn-worth of projects, meaning that 95 per cent and 79 per cent of respective projected revenues for 2023 and 2024 have already been secured. Its ability to secure public sector contracts is what gives its cash flows such reliability – accounting for 91 per cent of the order book.

With such a high degree of certainty about its future revenue, investors can therefore be reasonably confident in consensus forecasts for earnings, which are predicted to grow over the next two years. Based on those projections, the shares are currently priced at 8.4 times earnings for the 2024 calendar year, which is good value when you consider that assurance of revenue.

The bigger question is profit. Construction companies often operate on wafer-thin margins, and Galliford Try is no different. It did swing to a profit in this half-year period, and it offered hope that it could build on this. “The challenges around inflation and materials shortages [...] are now beginning to ease,” it said, adding that it expected full-year profit before tax to be at the upper end of analyst estimates. If its assumptions are correct, its pre-exceptional profit before tax for the year ending 30 June 2023 could hit £23.3mn compared with £19.1mn for the same period in the previous year.

Based on the timescales that construction companies such as Galliford Try tend to work to in terms of securing materials, labour and contracts, we think these targets are not unrealistic. However, the company remains out of favour and the share price has yet to recover after a 2019 profit warning and two years of pandemic disruption. The market is therefore still ascribing very little value to the underlying business, but we believe that a re-rating is justified. Buy.

Last IC view: Hold, 162p, 21 Sep 2022