Balfour sets sight on magic 300p level as turnaround continues

Hard evidence from Balfour Beatty that its turnaround remains on track helped to ease investor nerves on Wednesday after recent profit warnings elsewhere in the UK construction sector.

The FTSE 250 stock has moved sideways in recent months, with 300p a bridge too far despite the continuation of chief executive Leo Quinn's plan to focus on core markets and capabilities.

That strategy helped Balfour to deliver half-year underlying profits of £39 million, up from £11 million a year earlier. Significantly, Balfour is on track to meet full-year expectations and achieve its goal of "industry-standard margins" in the second half of 2018.

This optimism contrasts with recent updates from Sweden's Skanska, which revealed £33 million of UK project write-downs, and from former suitor Carillion after a profits warning that cost the job of its chief executive.

Balfour said its progress had been helped by booking new orders at improved margins and reduced risk.

It described its infrastructure pipeline in the United States and UK as buoyant, with the group continuing to win landmark contracts such as the Dallas Southern Gateway and the UK's high-speed rail project (HS2).

These schemes contributed to an order book worth £11.4 billion, although this figure is down 8% due to the group's policy of selective bidding.

In the UK, the '4Hs' - HS2, new nuclear power stations at Hinkley Point C and Wylfa, smart motorways for Highways England and the third runway at Heathrow airport - should lift government investment in infrastructure from 0.8% to over 1% of GDP by 2020-21.

Balfour added that even before the US presidential election, there was a strong market outlook for construction as more of the population migrates south and west into cities, driving urbanisation in its chosen markets.

This outlook has impressed Liberum, where analysts continue to believe that the company's shares can finally break the 300p barrier for the first time since April 2014.

The broker, which has a buy rating and price target of 335p, said Balfour has the potential for buybacks and special dividends should the trading progress continue.

It said: "As legacy contracts are completed over the next year or so, and as the business is stabilised, we believe that there is scope to focus on returns to shareholders."

Liberum assumes that its unchanged FY 17 dividend forecast of 3.8p increases 121% to the end of its forecasting horizon. Today's half-year dividend rose 33% to 1.2p a share.

Following today's results, Liberum continues to forecast a FY 2017 fully diluted earnings per share (EPS) of 11.3p while it has kept the outer years unchanged at 19.4p and 24.4p for FY 2018 and FY 2019 respectively. The shares are currently trading on a 2019 price/earnings (PE) multiple of 10.8 times.

Balfour's improved performance comes after it exited the Middle East market in order to focus on the UK, United States and Far East.

Its support services arm reported profits in the range of industry-standard margins, while US construction is well-positioned to do the same in the full-year. UK construction reported a profit from operations of £2 million, compared with a £69 million loss a year earlier.

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.