Can Balfour Beatty’s share price stage another post-earnings rally?

The UK’s largest construction group Balfour Beatty reports annual results next week. Will a strong second-half performance incite a post-earnings share price rally?

Balfour Beatty’s [BBY] share price has been volatile for the last 12 months, moving from 290p this time last year to 238.4p as of 5 March. In between, the share price has risen as high as 293p (February 2020) and as low as 194p (August 2019).

This mixed share price performance has been against a backdrop of great uncertainty in the UK economy, as Brexit and a future trade deal with the EU remain unresolved. The resulting lack of business confidence, big private and public construction projects as well as fears of a looming shortage of skills, have put pressure on Balfour Beatty and its peers.

But, going by its half-year results, the company is standing up to these challenges, thanks in large part to the fact that over 50% of its business and investment portfolio assets are outside of the UK.

Balfour Beatty share price: H2 results and beyond

Balfour Beatty’s underlying profit from operations rose 9% to £72m, up from £66m in 2018, while its order book climbed 5% to £13.2bn. This figure didn’t include work relating to the UK’s High Speed 2 railway project, for which Balfour Beatty has so far secured a number of contracts. The interim dividend went up 31% to 2.1p.

Balfour expects its annual profit to be slightly ahead of its expectations of £200m and in line with 2018 at around £205m. Revenues are likely to be 5% higher than £7.8bn it reported in 2018, with UK and US construction and its 50% owned joint-venture in Hong Kong all expected to deliver strong performance.

According to the Motley Fool, the annual rate of growth for Balfour Beatty’s earnings is 13%, with its profit margin set to expand from 2% to 2.4% by 2022.

The go-ahead from the government for the HS2 rail project, where the group has a £2.5bn design and build contract, will help to substantially boost its performance. It is also part of a joint venture that has been awarded a £1bn contract to build a station in West London for the new rail line.

The Conservative government’s pledge to “level up” the UK by investing more money into the north also suggests more construction and infrastructure projects are to come.

“This positive news flow is one of many announcements shareholders will prosper from in my opinion,” says John Wallace, writing in the Motley Fool. “If you consider the future potential of its earnings outlook, I think Balfour Beatty is a great value investment.”

“If you consider the future potential of its earnings outlook, I think Balfour Beatty is a great value investment” - John Wallace

Bullish on Balfour Beatty

Wallace is not the only one who is bullish on the share price. According to MarketScreener, analysts have a mean consensus of buy and an average price target of 343.57p.

Peel Hunt, for one, believes Balfour Beatty’s share price is well placed for “material outperformance” thanks to a shift towards higher-margin work and more attractive markets.

In December, Hargreaves Lansdown praised the work carried out by chief executive Leo Quinn over the last four years “stopping Balfour bidding for contracts at unsustainable loss-making margins”.

The statement refers back to the dark days of 2014 and 2015, when Balfour Beatty was hit by a series of profit warnings following optimistic contract pricing, poor project management and rising costs. In H1 2015, the company reported a £150m loss.

“Quinn’s turnaround has focused on overhauling an inefficient cost base and stopping Balfour bidding for contracts at unsustainable, loss-making margins,” Hargreaves Lansdown said. “The refusal to bid below a certain price means it's losing out on some contracts, but that's not stopped the overall order book swelling and the new approach means the pipeline should be more profitable.”

“The refusal to bid below a certain price means it's losing out on some contracts, but that's not stopped the overall order book swelling and the new approach means the pipeline should be more profitable” - Hargreaves Lansdown

Concerns for the construction player

Investors, however, need to pay attention to the group’s debt position. According to Simply Wall Street, Balfour Beatty’s liabilities total £1.57bn “more than the combination of its cash and short-term receivables”.

It has a market capitalisation of £1.5bn, suggesting that “shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry”.

Balfour Beatty share price vitals, Yahoo Finance, 10 March 2020

The group’s performance is also largely tied to the growth of the UK, US and Hong Kong economies. All three have their challenges and threats of impending slowdown and disruption.

What could be key is whether governments, hit now by coronavirus fears as well as economic worries, open their cheque books and fund new construction and infrastructure projects to boost growth.