Momentum builds at Balfour Beatty

Balfour Beatty (BBY) has boosted its full-year forecasts after a surge in profitability, causing its shares to jump by 9 per cent. 

Balfour Beatty (BBY) is starting to bounce back. The company said in its interim results that its support services arm is delivering margins of 6-8 per cent, and “is now expected to be at the top of this range for the full year”.  As such, profit from operations is due to overtake previous guidance. Analysts responded positively to the news, with Peel Hunt increasing its pre-tax profit estimate from £205mn to £230mn, giving earnings per share of 30p for the full year.

Management stressed that the division, which focuses on maintaining and upgrading infrastructure and utilities, is now characterised by “profitable recurring revenues underpinned by long-term contracts”.

Support services sustained Balfour Beatty  through the depths of the pandemic, when several of its London construction projects fell apart. But the limelight is now being shared by UK construction, which has roared back to life, driving a strong uptick in half-year profits despite revenue remaining flat.

A number of write-downs on private sector property projects in central London resulted in a loss of £23mn in the first half of 2021. However, the division has since recovered, reporting £18mn of underlying profit from operations – slightly ahead of 2019 levels. 

Peel Hunt analysts “sense the risk of further residential write-down is now passed”, given 92 per cent of Balfour Beatty’s UK order book is now public or regulated – management said last year the group would no longer bid for fixed price residential property projects in central London. The group has also finally shrugged off a military housing fraud case in the US, after reaching  a $65mn (£49mn) resolution with the Department of Justice in December.

Management is upbeat about future growth prospects, saying “the construction and infrastructure sectors remain central to government planning in the group's core markets”. This is backed up by the group’s order book, which has grown by 10 per cent to £17.7bn, providing good short- and medium-term visibility. 

Meanwhile, although construction margins remain very slim at 1-3 per cent, inflation seems under control. Investors will need to keep a close eye on profitability, however, as the group grapples with higher energy and raw materials prices, knock-on wage pressures and supply chain issues.

Balfour Beatty increased the size of its share buyback scheme to £150mn in March, when its full-year results were published. So far, the group has only bought back £47mn, but said it is still on track for £150mn by December. This will please investors, but macroeconomic headwinds remain concerning. Hold. 

Last IC View: Hold, 239p, 10 Mar 2022