Balfour Beatty's shares climb after better-than-expected results

Balfour Beatty (BBY) looks to be building a successful investment case. Its share price climbed 9 per cent in early trading after the construction company's revenue came in "slightly better" than analyst Investec had predicted.

The company pinned its surprising growth on its "operationally diversified portfolio" as increasing infrastructure projects offset a slowdown in commercial property projects. That is a common refrain among construction companies, with government work seen as less cyclical than the interest-rate-driven real estate market.

However, as we have noted with its rival Kier (KIE), this so-called "diversification" is not as diversified as some investors might like. Over £3bn of Balfour Beatty's revenue comes from UK construction, of which 95 per cent comes from the public sector.

On the one hand, that gives it earnings visibility. Balfour Beatty notes that the Conservatives and Labour are keen on large-scale infrastructure projects, so it insists this revenue stream will be safe and grow regardless of the election. On the other hand, the saga around HS2 shows how potentially partisan infrastructure projects can be, with funding thrown around and pulled depending on the political winds.

The other negative point for Balfour Beatty is the drop in underlying pre-tax profits – down 10 per cent to £261mn, which the group attributed to lower gains on investment disposals. The one-off impact is doubtless amplified because construction companies often operate on thin margins, which partly explains the drop. 

Balfour trades at 10 times the consensus forecast earnings for 2024, which is in line with Morgan Sindall (MGNS) but pricier than Costain's (COST) and Kier's seven times. Despite its healthy balance sheet and better-than-expected revenue, we are unconvinced investors get more for paying more for BBY. We maintain our neutral rating. Hold.

Last IC view: Hold, 336p, 16 Aug 2023