Negative sentiment has taken Balfour Beatty's share price too low.
Anyone looking for some exposure to a recovery in the construction industry both worldwide and within the UK, whilst simultaneously seeking downside protection, a decent yield and a blue-chip name could do a lot worse than Balfour Beatty (LSE: BBY).
The FTSE 250 company, which covers professional services, construction services, support services and infrastructure investments, has seen its share price lose almost 40% from the December 2007 peak, but this has been more to do with negative market sentiment than performance.
At today's price of 283p, the company is valued at £1,939m and sits on a price-to-earnings ratio for the year just gone, of a little over eight -- which is roughly the same for the year ahead according to brokers' forecasts. This looks too low for the construction group which has been defiantly robust through the recession and now looks to the future with confidence according to its final results for 2009.
The company is also feeling optimistic enough to cough up an increased annual dividend of over 4%. OK, there are better yields out there -- but few that offer as good a prospect for simultaneous capital growth.
Long-term value
With its finals, Balfour said it is well placed to benefit from the long-term growth in investment infrastructure. We won't see much of this in the current year, though. Profits in this area are actually expected to fall in 2010, but the order book rose to £14.1bn from £12.8bn a year earlier. The boss also told us he was more concerned with profitability than revenue and the brokers expect earnings to be down only marginally for this year.
The results seem to point to longer term growth and profitability to me. If Balfour can put in such a good performance in leaner times, it can surely do better still when the good times roll again. As such, it deserves a more ambitious rating for a blue chip.
UK public spending fears
And don't be too worried if you're bearish for UK construction. Turnover from outside the UK now accounts for almost half of sales -- 31% of which comes from the US. The company bought US-based professional service company Parsons Brinckerhoff in October via a rights issue, which raised a net £352m of the £380m price.
Conversely, the company has chosen to divest itself of a 23.9% interest in the Edinburgh Royal Infirmary public private partnership (PPP) and of its entire 50% interest in the Aberdeen Waste Water PPP concession for £24.3m.
It's the concerns over future cuts in public spending on roads, schools, hospitals and so on that have held back Balfour's share price. Such fears are understandable but look overdone. And where others see threat, the CEO sees opportunity. He anticipates UK infrastructure investment outstripping growth in GDP -- and expects the Government to look increasingly to the private sector for funding.
All about performance
Sadly for out and out value seekers, Balfour doesn't quite have it all. Whilst the company maintains an admirable antipathy towards debt -- having a healthy £572m of cash on the balance sheet at the year end, net current liabilities stood at £468m. And of the overall net assets of £1,006m; £1,429m is intangible.
So whilst Balfour is in no way a play on assets, this isn't peculiar for a company in the construction sector. In other words, it's all about future earnings and on that score, the long-term future looks bright. The shares look too cheap, based on past performance, what the company is telling us, its growing order book and excellent reputation.
One of the non-exec directors clearly agrees, stumping up £29,000 of his own money to buy shares last week at over 288p; always a good sign. I think private investors should consider joining him.
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