US Edition Balfour Beatty
259.1p -3.8
Questor says BUY
Since the election, there have been concerns about the group’s exposure to UK government contracts and the shares are now 13pc below the recommendation price, once the company’s rights issue has been taken into account. But Questor continues to think the concerns are overdone.
About 20pc of the group’s revenues are exposed to UK public spending, but the group has been diversifying geographically, part of which involved the purchase of US group Parsons Brinckerhoff in September last year.
The unit provides a whole range of “professional services”, which means Balfour now has expertise across the whole lifecycle of an infrastructure project – from design and funding to construction, operation and maintenance.
Of course, the construction market in the US is suffering too, but America’s infrastructure is creaking through a lack of investment over many years, so the group should benefit significantly from a recovery in the US.
Indeed, what was impressive in yesterday’s set of interim figures was just how strong the company’s order book is, given the uncertain market backdrop. Over the past six months it has increased by £500m to £14.6bn, which is a creditable performance and should provide some food for thought for the bears.
Indeed, the group unveiled two new contracts alongside the numbers. Balfour has signed a £460m construction contract for the second phase of a satellite building at Heathrow Terminal 2 and it has reached financial close on a £230m street-lighting contract for Coventry City Council.
Neither of these contracts are included in the order book figures above. Financial close on a number of other projects is likely in the second half, including projects such as the Denver Rapid Transport system.
In the first six months of the year, revenues rose to £5.2bn from £5.1bn, with pre-tax profits rising to £81m from £65m. So-called “underlying” profits, which strip out one-off restructuring charges, rose to £141m from £107m. Construction revenues in the UK fell 22pc and in the UK by 9pc, but there was good news on margins and the professional services side of its business performed strongly.
The interim dividend was increased by 5pc to 5.05p a share and it will be paid on December 3. New investors need to buy the shares before October 8 to qualify for this payment.
The company has no debt and its average net cash in the first half was £436m, compared with £224m in the first half of 2009. When Questor spoke to Ian Tyler, Balfour’s chief financial officer, yesterday, he said there would be some cash outflow as final payments for the Parsons Brinckerhoff acquisition were made. The group also intends to maintain a “strong” balance sheet and Mr Tyler hinted that any further bolt-on acquisitions would be in the professional services space.
The shares were first tipped on January 25 last year and Questor recommended taking up your rights to fund the acquisition on September 20 at a 48pc discount. This gave a theoretical ex-rights price of 299.175p for the original tip.
Although the shares are now 13pc below this level, they remain a buy. The company’s UK presence is limited, it is a global play on infrastructure development and the shares are supported by the 4.6pc yield, which is expected to rise to 4.9pc next year.
After a period of poor performance, the shares have bounced, but are still trading on a December 2010 earnings multiple of only 7.9 times, falling to 7.5 next year. This remains an attractive entry point. Buy.