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Construction giant, Balfour Beatty received a budget boost when the chancellor revealed an increase in infrastructure spending, with shares raising as much as 19 per cent this week.
Most of that gain has been wiped out now, in the latest bout of coronavirus fears and share prices are standing at 246.11p, so could Balfour Beatty be a good long-term buy?
Balfour Beatty’s full-year results for 2019 looked strong – pre-tax profits rose by 19 per cent to £138m and revenues increased by 7.7 per cent to £8.4 bn.
However, the building firm, one of the main contractors on the HS2 rail project, has stalled its planned £200m share buyback, in case it needs cash reserves to deal with the potential fallout of coronavirus.
Talking about the stalled buyback, Chief Executive Leo Quinn said: “We are maximising cash reserves in the event the virus becomes more impactful on the economy and the supply chain. We still have to pay wages to employees and to people on site.”
Coronavirus aside though, Balfour Beatty’s financials look promising after recent turbulent times. Quinn’s turnaround plan appears to be yielding returns as margins are rising and dividends are up 33 per cent on last year. Hargreaves Lansdowne is impressed with the company’s healthier margins and swelling order book, although it did point out that Balfour Beatty is a business very closely tied to economic headwinds and it’s impossible to measure the impact of coronavirus just yet.
Broker Jefferies reiterated its ‘hold’ rating on the stock but raised its target price to 265p, while both Peel Hunt and Berenberg reiterated their ‘buy’ ratings.
The budget announcement that the chancellor has pledged £640 bn of investment in roads, railways, schools, hospitals and power networks by 2025 is good news for Balfour Beatty, although some think the firm needs to extend their margins further, beyond the current 2.4 per cent to fully take advantage of the opportunity.
While the company is still classed as being in recovery mode after a series of profit warnings in recent years, its share price has largely stabilised, and it can be bought at 9.1 times forward earnings. In its results, it also reported a 52 per cent increase in year-end cash to £512m and a 13 per cent rise in its order book which Quinn described as profitable managed growth and cash generation on a sustainable basis”.
How the current coronavirus crisis will pan out remains to be seen but, based on these results, it looks like Balfour Beatty could be laying firm foundations for the longer term.
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