Great British Business: Manufacturing and Engineering

End to shocks from Balfour Beatty

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End to shocks from Balfour Beatty
Balfour Beatty has released an eye-popping seven profit warnings over the last couple of years. After being parachuted in at the turn of the year to resurrect the business, Leo Quinn has been going through its operations with a fine toothcomb. Ahead of Wednesday's half-year results and update on its strategic review, broker RBC has gone out on a limb and upgraded both its rating on Balfour shares and its price target by 50%.

The infrastructure group churned out its latest profits warning last month after Quinn uncovered a black hole of around £120-£150 million related to legacy issues in the UK, US and Middle East. Adding another score to its long-running tally of profit shocks, around £480 million of profit shortfalls have been announced since the beginning of 2014.

Most of the latest hit will be felt in the UK business, but issues here are well-known and most of these problem contracts should expire in 2016. There is a question mark above the US business, but the ongoing profitability of the region suggests issues in the UK will not be repeated in the US, says RBC analyst Olivia Peters.

"Given the issues the group faces, we have rolled forward our sum of the parts valuation to 2017E to get a normalised valuation of 300p per share from 200p per share," Peters explains. "We upgrade Balfour Beatty to outperform on the basis that we believe risk management and cost cutting will drive profitability."

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Much of Balfour's problems stem from a failure to successfully integrate a string of acquisitions. Although they have grown revenue four-fold since the millennium, purchases have left a complex organisation with little control, especially in regards to protection against the industry downturn.

"At the FY14 results presentation, Leo Quinn suggested that reviews were underway at 70% of the business," says Peters. "With the last profit warning on 9 July, we would be surprised if there were another a month later."

With plans to improve operating cash flow by £200 million, cut £100 million of costs and bring its performance in-line with industry standards, Peters reckons the UK construction business could generate a margin of between 1.5-2%, with the US margin doubling to 2%. She is confident the group will have increased earnings by £273 million from 2014-2017 and has upgraded 2015 revenue forecasts by 4% to £8.6 billion.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.


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