According to government sources, Philip Hammond will use his first Autumn Statement as chancellor to increase the UK’s spending on infrastructure in an attempt to stimulate economic growth after Brexit. Many City analysts have celebrated this news as the UK’s crumbling infrastructure is in dire need of new funding to bring it up to scratch. With borrowing rates at their lowest level ever, now is the perfect time for the government to embark on such a strategy.
The UK’s National Infrastructure Delivery Plan 2016 — published at the beginning of 2016 — outlines the details of £483bn of investment in over 600 infrastructure projects and programmes in all sectors and spread across the UK, to 2020/21 and beyond. Hammond’s extra spending pledge is likely to be added on top of this total, which could amount to hundreds of billions of pounds in extra spending over the next few years.
Construction and engineering firms such as Carillion (LSE: CLLN) and Balfour Beatty (LSE: BBY) will undoubtedly be the main beneficiaries of this additional spending.
Turnaround nearing completion
Balfour Beatty has been described as “one of the largest turnaround situations in the UK market” as after years of restructuring and billions in sales, the company is only just starting to eke out a profit. However, after its broad-based restructuring, Balfour is now in one of the best positions it has ever been in to benefit from increased infrastructure spending.
Prior to the group’s restructuring, Balfour chased a growth at any cost strategy, accepting excessive risks by bidding for work at low margins. The strategy left too many contracts that were destined to generate losses and coupled with management’s acquisition spree, Balfour’s balance sheet was packed full of risks.
Under new management Balfour has adopted a much more conservative strategy. Sensible bidding, continued control of costs and the sale of non-core assets has restored confidence in the group. Based on the firm’s current order backlog, City analysts expect earnings to recover steadily over the next few years. Earnings per share of 11.4p are pencilled-in for the year ending December 30 2016, and earnings growth of 47% is expected for 2017 with earnings per share of 16.8p predicted. A wave of new infrastructure commissions from the government will accelerate the company’s recovery.
Slow and steady
Carillion has always been run in a much more conservative manner than its larger peer but the group has struggled to grow. Indeed, while Balfour has grappled with losses over the past two years, Carillion has remained profitable with pre-tax profits set to hit £180m this year, up from £143m for 2011.
But despite Carillion’s slow-and-steady approach to business, the market continues to give the company a wide berth. Shares in Carillion currently trade at a forward P/E of 7.2 and support a dividend yield of 7.5%. It may not take long for the market to re-rate the company once the chancellor hikes infrastructure spending.
So, based on Carillion’s valuation and the company’s position in the UK’s construction market, it looks to be a great play on infrastructure spending.
