SHARING TIPS: Balfour Beatty is built on a solid foundation
In a world of rising interest rates and skyrocketing inflation, construction companies have had a particularly difficult ride. Some analysts believe that stocks in Beatty Balfour have taken a hit, which may give investors a chance to buy.
Its shares – at £3.20 – are down 6 per cent since January, mainly due to an 11 per cent drop in value last week, when the company announced its interim results.
The numbers were in line with expectations, but CEO Leo Quinn was cautious about the company’s pipeline of projects in the United States amid “difficult macroeconomic conditions.” However, he said he was confident “in our ability to deliver significant future shareholder benefits.”
He also put his money into what he said and grabbed £175,000 worth of shares after the price fell. Should the rest of us do the same? Some analysts believe Balfour has a compelling case. Unlike most British construction companies, he has significant infrastructure assets, so in theory is less exposed to a housing market crash caused by inflation and rising rates.
Couple this with a massive amount of cash, a support services division with stable prospects, and a share buyback program, and we have a recipe for shareholder returns.
Balfour is due to earn £30m this year from interest payments alone, says Jonathan Coubrough, an analyst at investment bank Numis, who describes the company’s interest payments as “a big stream of income”. He is also pleased by the strong construction performance in the UK, driven in part by HS2, as well as the excellent performance in Hong Kong of the company’s joint venture with Jardine Matheson, curiously called Gammon.
So what is the concern? One problem is weak demand in the United States, where poor economic conditions have led commercial developers to delay construction. Also of concern are the high start-up costs in the support services division. Balfour Beatty’s order book shrank in the first half of the year, which has caused some concern among investors.
However, there are already signs that the US outlook is improving. Quinn says this is particularly evident in Texas.
Graham Hunt, an analyst at investment bank Jefferies, says the market is underestimating the amount of work Balfour will have in the US in the next 18 months. Arnaud Lehmann, an analyst at Bank of America, says he believes the group can grow revenue in the second half of 2023 and hit the high end of the guidance, between 6 and 8 percent.
Midas Verdict: Infrastructure spending is not a guaranteed gold ticket in a housing crisis, although Balfour Beatty’s presence in this market insulates it from some of the construction problems elsewhere. However, the company is benefiting from rising rates thanks to its cash reserve, and there are signs that the US market is beginning to stabilize.
Couple this with a determination to return cash to shareholders through buybacks and dividends, and you get a relatively attractive package. There are risks to the business if infrastructure spending slows, but the current weakness in stock prices is a buying opportunity.
Traded in: main market Heart: BBY Contact: balfourbeatty.com or 020 7216 6800
