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Balfour Beatty losses increase but turnaround plan on track

Discussion in 'Market News' started by Lily, Mar 15, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Construction group falls £123m into the red but hopes to restore dividend in August

    Balfour Beatty has seen its underlying full year losses increase but it says its turnaround plan is showing signs of progress.

    The construction group fell £123m into the red in 2015, worse than the £80m loss seen in the previous year, due to problematic contracts in Britain, the middle east and Asia. But it hoped to be rid of the bulk of its UK contracts by the end of this year, and its decision to scrap its dividend, cancel a share buyback and reorganise its pension fund payments have all helped to strengthen its balance sheet. Now it expects to reinstate its dividend “at an appropriate level” at August’s half year results. Chief executive Leo Quinn, who joined last March, said:

    Coming into 2015 the business performance had deteriorated as a decade of forced growth culminated in an overly complex business, poor contract discipline and unaffordable overhead costs.

    Decisive action was taken to arrest the decline...Half way through...the group is on course to deliver on [its] specific targets.

    UK losses were always going to be the key feature of results, but we believe the tangible management progress on costs and cash performance set the scene for movement back to profit in 2016. We contend that the majority of legacy issues will be eliminated this year, and outline here our 2018 estimates [pretax profits of £185m and earnings per share of 23.5p] which are driven by management initiatives to give Balfour the strongest recovery profile in the sector.

    Meantime the ongoing value of, and investment in, the PPP [public–private partnership] portfolio continues to provide strong underpinning at the current share price. We therefore expect a progressive re-rating from special situation to recovery stock for the company - in an industry which is only at the start of the upturn in terms of government investment and industry recovery.

    Improving market conditions and self-help should provide a powerful cocktail, implying a recovered 2018 PE of 13.5 times. Our 320p target price is based on a sum of the parts. We value the PPP business at £1.5bn, consisting of the around £1.2bn portfolio and the much overlooked PPP pipeline, where Balfour intends to spend £250m over the next five years. Given that these investments are already reflected in our cash flows and net debt estimates, and that historical, albeit high, valuations have been 2 times book, we believe that it is actually very prudent to value the pipeline at £250m. We also believe there is positive value in the Construction business in spite of it being loss making in 2015, and we see a 2.5% margin as achievable in the business medium term.

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