Shares in FTSE 250 construction and infrastructure firm Balfour Beatty (BBY) surged after half-year profits beat expectations. The 10% rally comes after a period of weakness for the company’s shares, which are down from around 300p earlier this year to 217p, a fall of nearly 30%.
The company has been engulfed by the woes of the outsourcing sector after the demise of Carillion last year. Sector rival Kier (KIE) is one of the most shorted stocks on the FTSE, and 1.5% of Balfour stock is being shorted by the Canadian Pension Plan and a hedge fund spun out from Man Group, AHL Partners. The shares rose 10% to 221p after the results.
Balfour reassured investors about its cash position by bumping its dividend by 31% to 2.1p, and the shares currently yield around 2%. Profits are up from £50 million from last year to £63 million in the first half of the financial year, a rise of 26%.
John Moore, senior investment manager at Brewin Dolphin, said of the latest update: “It’s a decent performance from the business, but in the short-term the company may continue to be tarnished with the same brush as its competitors.” He notes Balfour’s unwillingness to take on low-margin or complex projects, unlike its rivals, as a positive for the firm. The company’s order book rose 5% on last year to £13 billion, it said.
Investors were also reassured as Balfour Beatty also reaffirmed its annual profit guidance as well as an increase in its cash position from £337 million at the end of last financial year to £425 million, a rise of 26%. For comparison, Kier had net debt of £180 million at the end of 2018, although it is targeting a positive cash position this year.
Artemis is one of biggest investors in Balfour Beatty - the firm accounts for more than 3% of it the Artemis Special Situations fund, which has a Neutral rating from Morningstar and two stars. Invesco is also a significant shareholder – the Silver-rated Invesco UK Growth fund has more than 2% of its assets in Balfour shares.
Special situations funds generally seek out companies that are out of favour with the market, perhaps because of concerns about the sector in which they operate or issues with the business itself. Balfour Beatty has been restructured in recent years through its “Build to Last” programme, which was launched in 2015 under chief executive Leo Quinn, who is known as a “turnaround specialist” from previous roles at banknote printer De La Rue and Qinetiq.
Infrastructure has risen in popularity as investor theme in recent years but as the UK Government is one of Balfour Beatty’s biggest customers, there are concerns that political and economic uncertainty this year could weigh on the construction sector. However, more than half of Balfour’s portfolio is denominated in dollars so it has benefited from the weakness in sterling since the 2016 referendum vote. The company is also more geographically diversified than some in the sector, with projects in the US and Hong Kong.
