With fears over cuts overdone, Balfour Beatty is looking cheap.
Balfour Beatty (LSE: BBY), which released interim results last week, looks to me like a bit of a bargain. But before I look at any numbers, what does the company actually do?
Well, it's in the unimaginatively-labelled and very unglamorous business of "infrastructure", specifically in engineering and construction. Building, design, civil engineering, rail engineering, management of construction projects -- few can have failed to see the company's logo displayed on UK building sites.
In fact, Balfour Beatty is the UK's leading company when it come to civil infrastructure projects, has developed its business in the US over the past three years, and is targeting growth in South East Asia and the Middle East.
And to complement its direct construction activities, Balfour Beatty also offers professional consultancy services, so it's pretty much got the whole of the engineering construction industry covered.
Does that sound like I'm painting to glossy a picture so far? Well, that's possible, because most of that information came from the company's own web site. So what's the downside?
Downside?
The main risk is that it's a bit of a cyclical industry. In economic hard times engineering and infrastructure plans get put on hold -- and governments cut back on spending to get their countries' finances back on track.
Balfour Beatty has so far come through the recession pretty well, and forecasts for the end of 2010 are looking quite decent (and judging by the recent interim results, which I promise I'll get on to shortly, things are looking on track). Reasonable results are pencilled in for 2011 too, though a year is a long time in business.
The overall picture looks something like…
| Year | 2005 | 2006 | 2007 | 2008 | 2009 | 2010
(e) | 2011
(e) |
|---|
| Turnover (£m) | 3,837 | 4,487 | 6,466 | 8,261 | 8,954 | | |
| Pre-tax profit (£m) | 141 | 109 | 157 | 270 | 267 | 315 | 328 |
| Adjusted EPS (p) | 21.5 | 20.6 | 30.5 | 34.6 | 34.7 | 35 | 36 |
| Dividend per share (p) | 5.8 | 10.4 | 8.5 | 10.5 | 11.5 | 12.6 | 13.1 |
The biggest concern in the mind of investors is the threat from UK government cuts over the next couple of years. With government spending on housing and infrastructure being pared, obviously some of Balfour Beatty's income is going to be hit. And although the company is looking to expand towards the booming East, at its last year end more than 90% of its business was still in the UK and the USA.
Interim results
So what did the interim results, for the six months to 26 June look like then? They looked like this…
| | H1 2010 | H1 2009 |
|---|
| Total revenue (£m) | 5,199 | 5,072 |
| Pre-tax profit (£m)* | 141 | 107 |
| Adjusted EPS (p) | 15.5 | 14.9 |
| DPS (p) | 5.05 | 4.79 |
*Profits include exceptional items, and once those plus amortisation are taken into account, underlying pre-tax profit of £91m was recorded, against £86m for the first half of last year.
Judging by chief executive Ian Tyler's comments, the threat from government cuts has been exaggerated, as he emphasised that only about 20% of Balfour Beatty's business is affected by government spending and that the remaining 80% is looking healthy. In fact, on the same day as the results were released, the company announced a new £460m contract with airports operator BAA to develop Heathrow's terminal 2.
At the half-year point, Balfour Beatty had an order book (which it described as "high-quality") of £14.6bn, up from £14.1bn at the end of December 2009. And the company remains confident in its outlook, saying its "continuing progressive dividend policy reflects our confidence in the Group's ability to deliver growth over the medium term."
Valuation
At the current share price of approximately 260p, which has barely budged since the results announcement and has been largely flat for the past 18 months, current forecasts put Balfour Beatty shares on a forward P/E of just 7.7. And its forecast dividend yield comes in at a healthy 4.8%.
That might be a fair price for good a company going through a bit of an economically tricky patch, with confidence in its dividend a bit weak, and perhaps with a bit of debt to manage. But Balfour Beatty has no debt -- in fact, it regularly operates with strong net cash. It also sounds pretty firmly committed to its dividend policy, and I'd rate it amongst the safest dividends on offer these days.
Overall, I see a strong and well managed company, which operates its finances prudently, and whose shares have been marked down too far due to overblown fears of suffering at the hands of government spending cuts. And that makes for a bargain.
If you have any thoughts about Balfour Beatty as an investment, please do let us hear them, below. And, of course, we have a discussion board dedicated to the company.
More from Alan Oscroft:
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