Balfour Beatty’s shares have now fallen by 35% since 5 March, when the firm published its 2013 results. Since then, there have been two profit warnings: today’s update says that profits from Balfour’s engineering division are expected to be around £35m lower than expected.
Now that the bad news has been made public, is now the time to buy, or is there more trouble ahead?
Before I get to the positives, I feel I should point out some of the problems still faced by Balfour Beatty.
The big risk, in my view, is debt. Balfour’s net debt rose by around 25% to £420m last year, by my calculations, and the firm also has a sizeable £434m pension deficit.
Cash flow is poor, and the share’s current valuation isn’t outrageously cheap, either: today’s slide leaves Balfour stock on a 2014 forecast P/E of 12.5, while its prospective dividend yield of 6.4% is only just covered by forecast earnings.
Now for the good news
Balfour Beatty says that it will cover the shortfall in engineering profits by continuing to sell its PPP infrastructure assets.
While this smacks of selling the family silver, the firm’s progress to date suggests it is a good time to be exiting these investments: Balfour’s most recent PPP sales totalled £97m, of which £51m was profit. The firm said that the total sale price was 82% above its own valuation, and most of Balfour’s PPP asset sales last year generated similar profits.
In today’s profit warning, Balfour indicated that a number of other assets offered similar potential for re-rating, and that it intended to capitalise on the current strong market, which is being driven by institutional investors looking for yield.
Elsewhere in the business, things don’t look so bad, either. The firm’s construction and support services businesses are trading broadly in-line with expectations, and are benefiting from healthy activity levels in the US and Dubai, as well as strong performances in the UK transport and utility sectors.
A final bonus could come from Balfour’s professional services division; the firm is hoping to sell its Parsons Brinckerhoff business, and says that “a competitive sale process is now fully under way”.
Balfour Beatty could deliver a strong turnaround, but I’m concerned that it’s overly dependent on flogging its PPP assets, and is not generating enough cash from its operations.
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> Roland does not own shares in Balfour Beatty.