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Balfour Beatty plc Gains On Solid Update, But Is The Dividend Safe?

Shares in Balfour Beatty (LSE: BBY), the international infrastructure group, were up as much as 5% in early trading as the group reported flat order books and a reduction in debt.

The company reported an average net debt of £477m for the nine-month period and planned to reduce it to £400m using proceeds from the Parsons Brinckerhoff disposal. The sale of the construction consulting firm was completed on 31 October for $1,242m (£753m). Balfour Beatty also plans to spend £85m reducing the company’s pension deficit, and up to £200m to buy back shares that are currently languishing near a five-year low.

The group plans to retain the remaining funds to ensure a strong balance sheet and financial flexibility in the future, a prudent measure after the 78% profit slump in 2013 and another profit warning in September. In the same announcement, management hinted at a possible cut to the dividend after the loss of revenue from the Parsons Brinckerhoff disposal.  

The UK construction business continues to focus on creating a more efficient supply chain and on reducing overheads, while the regional business is working on reducing exposure to small contracts and its number of delivery units.

The construction services order book grew to £7.9bn after new contracts in the UK and exchange rates contributed positively. The Support Services order book fell to £3.7bn as long-term Power and Water contracts completed, offsetting the Construction Services growth.

At the end of Q3, the order book was flat at £11.7bn after the half-year book was restated £1.3bn lower than the £13.0bn previously reported.

KPMG’s review of the troubled firm’s contract portfolio is on track to be completed in 2014, after even management admitted to being caught off guard by the level of write-downs discovered in the UK contracts. In a conference call in September Executive Chairman Steve Marshall said:

[W]e’ve all been surprised by what has happened in this business and therefore, certainly I and the Board judge that the right thing to do to give the company the assurance it needs and frankly, the investors the assurance that they need, is to have an independent review.”

Investors are worried, and rightly so – if management weren’t aware of previous inaccuracies in contracts, it is entirely possible there are further issues lurking in the books. As such, I would be wary of any forward guidance from management, even though the balance sheet has been strengthened by disposals.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.