Balfour Beatty expects to beat full year targets

Balfour Beatty said its performance for the year will be above previous expectations after sales of its interests in two infrastructure projects exceed directors' valuations.

The FTSE 250 construction group said revenues were in line with the first half of 2018 and that it was on track to achieve "industry-standard margins in all earnings based businesses" in the second half.

US construction margins are expected to improve within the 1-2% range as revenues stay flat as previously guided, while profits in the Far East are expected to grow. Support Services margins are also expected to inch up.

Management also highlighted their efforts to strengthen the balance sheet, with gross debt down 45% over the past 12 months after remaining convertible bonds were paid down this month.

Average monthly net cash for 2018 is now forecast at £185m, well ahead of the previous £140-170m guidance, with year-end net cash now expected to be broadly in line with the prior year.

"The actions we have taken since the start of 2015 have created a strong foundation for the future," said chief executive Leo Quinn. "We have consistently invested in our capabilities, systems and leadership while de-risking the business, strengthening the balance sheet and selectively building the order book."

As part of Quinn's Build To Last strategy, Balfour has been looking to maintain bidding discipline and risk management in the way that it wins work within its three chosen geographies of UK & Ireland, US and the Far East, and in three core sectors of construction services, support services and infrastructure investments, reflect the introduced under Build to Last.

Quinn also said this "provides resilience as the group is less exposed to a downturn in a single geography or sector", adding that the trading environment for the chosen markets and capabilities "remains favourable".

The forecast year-end order book is around £12bn from £11.4bn a year ago and £12.6bn at the half-year stage.

A final boost to 2018 profits, the Infrastructure Investments arm completed the sale of its interest in Fife Hospital for £43m in September and expects to complete a partial sale of 80% of its Edinburgh University student accommodation project for £24m, both of which were above valuations recorded as of June.

There was also news that the millstone joint venture project of the Aberdeen bypass, also known as AWPR, will be completed by the end of the year, with the construction JV "continuing its dialogue with Transport Scotland on a commercial agreement in relation to associated claims".

Balfour shares rose more than 3.5% in the first hour of trading on Friday morning to 255.3p.

Analysts at UBS said: "Considering the troubles faced by other contractors in the UK, we think this is a stellar performance and should reverse some of the recent share price weakness."

Broker Liberum said it was increasing its full year forecast for earnings per share by 18% due to the £25m profit on disposal on Edinburgh and its average net cash estimate from £145m to £185m due to better working capital.

"We continue to expect industry margins in H2 2018 at Construction and Aberdeen will be complete by the year end. At Investments, we increase expected profit on disposals from £40m to £65m. 2018 cash flow will be messy but 2019 working capital should be neutral and profits should convert to cash."

Analysts at Numis said the year-end trading statement "delivers – with tangible benefits of management actions operationally, financially and also in terms of investment attractions".

The headwind from the AWPR is "effectively removed", while US, Hong Kong and support services are "all growing, average net cash is increasing and investments disposals continue to take place above DV valuation", which "backs up our view that Balfour Beatty is at the start of sustained growth due to operational and financial leverage that is not reflected in the share price".