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Balfour Beatty - trading in line with full-year guidance

Balfour Beatty's full-year revenue is expected to grow by around 5% from &pound8.9bn...

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Balfour Beatty's full-year revenue is expected to grow by around 5% from £8.9bn. The uplift was driven by higher HS2 volumes and increased airport business in Hong Kong.

Underlying operating profit is expected to land broadly in line with the prior year's £232mn.

The average monthly net cash position is set to land in the £650-700mn range.

The order book is expected to have risen slightly from the £16.4bn reported at half year. The group's order book was unaffected by the UK government's decision to cancel HS2 Phase 2, which had yet to be contracted.

A new share buyback programme is set to begin in January, with its total value set to be confirmed alongside full-year results in March.

The shares were broadly flat following the announcement.

View the latest Balfour Beatty share price and how to deal

Our view

A short trading update showed that full-year profits are set to remain in line with last year, despite all the headwinds Balfour's had to wrestle against. Volumes in the UK and Hong Kong have held up reasonably well, and orders in the US have started to pick back up.

While we can't knock progress, even in the good times margins in the construction sector are pitifully thin. That's why at the last count, we were pleased to see the operating profit margin creep back up towards 2%. Such low margins leave little room for error.

Selecting longer contracts where the group has expert knowledge reduces risk and increases earnings visibility (more on that later). Balfour's also choosier about its private-sector work than it has been in the past. That's particularly true in the UK, where the public sector makes up over 95% of future orders - meaning revenues are more likely to hold up in an economic downturn.

And while infrastructure spending remains a key priority in the US and UK, the current high-interest rate environment is causing delays in some projects going to contract, mainly in the US, as customers wait for economic stability.

We're starting to see early signs of orders trickling through again, with the order book expected to grow slightly from the £16.4bn seen at the half-year mark. That gives plenty of visibility over revenue in the short to medium term. The highly publicized cancellation of the next phase of HS2 looks set to have no impact on the group's order book. But it does mean that Balfour will likely have to pedal much harder to secure new business.

Last we heard, profits from infrastructure investments have dipped, largely due to increased compliance monitoring costs and a lack of disposals. But there's set to be £15-30mn worth of disposals in the second half, which should help to soften the blow of rising costs.

And in both the UK and the US, Balfour's investment portfolios are positively linked to inflation. In recent years it's benefitted from climbing rates, but with that trend having reversed, we expect to see investment valuations and profits take a hit.

The balance sheet is in good health, with cash in the bank and access to debt facilities. Given there's plenty of competition for the group's cash resources, including a new pledge to continue buying back shares, we'd like to see cash generation improve from current levels to help underpin the buybacks. Remember, there's no guarantee of investor returns.

If a government-led infrastructure boom fails to make it through to the bottom line, then shareholder returns will likely be back on the chopping block. This uncertainty is reflected in Balfour still trading below its longer-term average on a price/earnings basis.

The Share Research team is ceasing covering of Balfour Beatty. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

Balfour Beatty key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 7th December 2023