Balfour Beatty - "Dr. Quinn, Medicine Man"

Balfour Beatty: Leo Quinn arrived back at Balfour Beatty in January, having left as a sprog, so these annual results to 31^st December 2014 are only the very early stages of the corporate recovery. Quinn did a very good job of sorting out QinetiQ, but seemed to run out of steam once the ‘corporate doctor’ phase was over. The recent dull performance of QinetiQ suggests that he left a group with little forward momentum, although many would point out that the tough defence-spending environment was an unavoidable external factor. Anyway, now he is wielding a set of scalpels at Balfour Beatty. In 2014 revenues only slipped 2% at constant exchange rates, to £8.44bn, but the underlying operational loss was £58m, against a profit of £131m in 2013. However, a sea of red ink one-offs lead to a pre-tax loss of £304m on continuing operations against a £49m loss last time. A further £118m provision against UK construction losses has been taken, on top of a previous £70m. Quinn’s inheritance is a book of business taken on with poor risk assessment and too skinny margins. Working through this will take at least another couple of years and that faint rattling noise could well be more skeletons trying to fall out of the cupboards. The rest of the group is a mixed bag, but it is the UK that dominates. Whilst Hong Kong revenues grew at a clip, there was £15m of losses from the Middle East. The investments division profits increased from £102m to £127m, with the portfolio value reaching £1.3bn against £766m last time. In part this is due to an increased directors’ valuation sparked by John Laing’s cheeky bid approach last year. Post the disposal of Parsons, the balance sheet has cash of £219m, with the pension fund deficit down £306m to £128m, helped by a good asset performance (and the Trustees have allowed a less onerous catch up payment schedule). The final dividend has been passed with a stated intention to declare a final this time next year on the back of a two year plan to improve ‘cash in’ by £200m and ‘cost out’ by £100m.

So all this is right up Quinn’s street and what happens beyond is of no immediate concern. Surgery first, physiotherapy second is a good game plan. The market cap of £1.65bn is not much more than the £219m cash and £1.3bn investment portfolio. So the UK construction side is pretty much in for free (which may still be optimistic?). Forecasts for this year are a bit disparate, but 8p-10p should cover it. The share price reacted well to Quinn’s plan, moving up to 238p, but at the 9p mid point for eps that is a PE of 26.5x, with flimsy dividend support. A PE of 15x would demand eps of almost 16p, which seems unlikely before FY2017. So I can’t see much P&L driven upside from here and little interest for dividend fans, but it still looks like there is a break up story and that is where the value release could lie. (Neil Cumming^, 26^th March 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower