Balfour Beatty stays on track

The UK’s biggest listed contractor, Balfour Beatty (BBY), is much better protected from the slump in certain parts of the UK construction market than many of its peers. 

For a start, it makes less than half of its group revenue domestically, and its US arm is almost as large. 

Moreover, it has little or no exposure to the domestic housebuilding market, which is the source of most of the industry's woes. Instead, it uses its scale to focus on infrastructure – particularly big-ticket schemes like the HS2 high-speed rail project and the Hinkley Point C nuclear power station. And although things don’t look quite as rosy for infrastructure spending as they did a year ago, with the Department for Transport delaying parts of HS2 and various highway projects due to funding constraints, they don’t look quite as bleak as they did following the collapse of Liz Truss’s short-lived stint as Prime Minister last year, either. 

Indeed, in the first half Balfour Beatty's UK construction arm grew underlying profit by two-thirds to £30mn, on largely flat revenue. This made it the group's stand-out performer, with underlying operating profit flat in the US construction arm and declining in both its support services and infrastructure investments businesses. Group-wide underlying operating profit fell 6 per cent to £80mn.

The size of the company’s order book also shrank by £1bn since year end to £16.4bn, which it blamed on a more sluggish commercial property market in the US. The company focuses more on buildings than infrastructure in the country, where fixed fee contracts offer "limited scope to mitigate inflation and schedule risk". Besides, despite the passing of various laws to boost infrastructure spending, it has “yet to see the impact” in terms of project volumes increasing.

Balfour Beatty’s shares were down 8 per cent by noon on results day, moving them into lossmaking territory for the year despite the company maintaining full-year guidance (and spending £87mn on buybacks). The shares now trade at 10-times FactSet consensus forecast earnings, below their five-year average of 11-times. The cash on its balance sheet makes it look even more attractive on an enterprise value basis – at 3.5-times cash profit it is valued at half of its longer run average.

In our view, though, this is a fair assessment of the heightened risk of a slowdown in project spending in the UK and US, as well as the less lucrative environment for infrastructure investments. Hold.

Last IC View: Hold, 350p, 15 Mar 2023