Construction is notorious for its wafer-thin margins and Balfour Beatty’s (BBY) ‘Build to Last’ programme has been targeting the so-called ‘industry standard’ across its operations. Last year saw the underlying operating profit margin in UK construction expand by 0.6 percentage points to 2.1 per cent, within the desired 2-3 per cent range. This could improve further in 2020 as the group bids more selectively on contracts and the problematic Aberdeen Western Peripheral Route (AWPR) route has now been completed.
Over in US construction, underlying operating profit rose by close to a fifth to £52m, with the margin ticking up slightly to 1.4 per cent – the industry standard is between 1 and 2 per cent. Around 85 per cent of sales are derived from the general building market while the rest comes from civil infrastructure. The buildings business is capitalising on increasing regional demand for infrastructure and focuses on repeat customers. It completed a $172m (£133m) project for a Disney resort last year, continuing its previous work for the company.
The order book has expanded by 13 per cent to £14.3bn, driven by wins in US construction. It will benefit further now that HS2 has officially been given the green light. Balfour has over £3bn-worth of work that has been awarded but not yet contracted – including a joint venture to build the £1bn Old Oak Common station – and this is expected to feature in the order book in the first half of 2020.
Revenue from support services fell by 7 per cent to £1bn on the back of lower volumes from power transmission and distribution and the conclusion of the Area 10 highways contract. While margin improvement kept the division's underlying operating profit steady at £47m, this excludes a £58m impairment charge after reassessing the outlook for the gas and water business.
Excluding £120m in lease liabilities and the group’s unsecured loans, net cash jumped by more than 50 per cent to £512m. This was aided by a £32m working capital inflow as construction projects were mobilised – a stark reversal from the £229m outflow seen a year earlier.
Liberum forecasts adjusted pre-tax profit of £199m and EPS of 23.4p in 2020, rising to £208m and 24.3p in 2021.
| BALFOUR BEATTY (BBY) | |||||
| ORD PRICE: | 243p | MARKET VALUE: | £1.7bn | ||
| TOUCH: | 243-244p | 12-MONTH HIGH: | 297p | LOW: | 192p |
| DIVIDEND YIELD: | 2.6% | PE RATIO: | 13 | ||
| NET ASSET VALUE: | 200p* | NET DEBT: | 1.5%** | ||
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) | |
| 2015 | 6.96 | -199 | -30.2 | nil | |
| 2016 | 6.92 | 10 | 0.2 | 2.7 | |
| 2017 | 8.26 | 117 | 23.7 | 3.6 | |
| 2018 | 7.81 | 123 | 19.7 | 4.8 | |
| 2019 | 8.41 | 138 | 19.0 | 6.4 | |
| % change | +8 | +12 | -4 | +33 | |
| Ex Div: | 21 May | ||||
| Payment: | 3 Jul | ||||
| *Includes intangible assets of £1.1bn, or 165p a share | |||||
| **Includes lease liabilities of £120m | |||||
