Shares in FTSE 250 infrastructure group Balfour Beatty (BBY) were bottom of the pile losing more than 5% to 302p even though the firm increased its earnings expectations for the 2022 financial year.
While first half profits from operations were positive to the tune of £60 million compared with last year’s loss of £14 million, investors seemed to take exception to the underperformance of the private sector property business, raising questions over whether the firm’s turnaround was as comprehensive as claimed.
SIDE ISSUE
Due to the impact of the pandemic, Balfour Beatty saw a number of its private residential projects in London fall behind schedule, triggering write-downs. As a result, the firm says it will no longer bid for fixed-price residential developments in the capital.
The news overshadowed what was generally an upbeat interim statement. UK construction services performed well with projects such as HS2 North, Hinckley Point C and Crossrail sites progressing, while profitability at the US construction division was ‘materially higher’ than 2020 and above pre-pandemic levels.
CASH RICH
The order book was roughly flat at £16.1 billion at the half-year stage, while both average net cash and period-end net cash grew even after a £100 million outflow for the share buyback and a 43% increase in the interim dividend compared with the 2019 payout.
The group has started to monetise its £1.1 billion portfolio of infrastructure assets with two Canadian hospitals sold during the half for £20 million and a further £48 million of UK PPP assets since the end of June.
Full year operating profits at the earnings-based businesses are expected to be in line with 2019, as previously guided, while support service margins for 2022 are now seen at between 6% and 8% from 3% to 5% previously, which means overall earnings will be higher than forecast.
EXPERT VIEW
Numis analyst Jonathan Coulbrough commented, ‘In our view, it is testament to strength of delivery across the group that write-downs have not resulted in downgraded 2021 guidance, and 2022 expectations are upgraded’.
Following the hike in the interim dividend, Coulbrough said he expects a 'sizeable c.15-20% total shareholder return over the medium term'. Numis raised its target price from 380p to 395p on higher net cash in its valuation model and reiterated its buy call.
With its high levels of cash generation, and a £1 billion ‘goodie bag’ of infrastructure assets which it can dip into at any time, we suspect Balfour Beatty is likely to attract private equity interest if the market doesn’t re-rate the stock first.
