Industry Spotlight

Kier vs Balfour Beatty: share prices dive amid decade-low construction output

Activity in the UK construction industry has dropped to its weakest level in more than a decade, data revealed on Monday shows. Kier [KIE] and Balfour Beatty’s [BBY] share prices have tumbled as a result, down 87% and 11% since this time last year respectively.

IHS Markit’s construction purchasing managers’ index dropped to 43.1 – well below both the 49.3 figure analysts were expecting and the threshold of 50, suggesting the majority of companies are scaling back their operations.

 

Industry commentators have said that projects being delayed due to Brexit uncertainty are behind the record-low figures. This “underlying climate of indecision”, as described by KPMG’s UK head of infrastructure, building and construction Jonathan White, is unlikely to go away any time soon, suggesting the worst could be yet to come for construction firms. 

By Tuesday’s close, Balfour Beatty was down 0.9% from Monday’s open, while house-builder Galliford Try [GFRD] fell 1.5% and Kier was down 0.7%. 

Despite marginal recoveries made by Thursday, these falls are representative of a wider downward trend among construction industry stocks, which have been plagued by profit warnings and project delays for months now.

 

Kier and Balfour Beatty share price: the bigger picture

For Kier investors particularly, 2019 has been painful. In the year-to-date the company’s share price has fallen 74% to 105.9p. The stock plunged more than 40% overnight following a profit warning on 3 June; it has since fallen another 35%. 

Construction and infrastructure firm Balfour Beatty, meanwhile, closed at 242.8p, 19.5% lower than its 52-week high of 301.70. Overall for the year, its share price is down 1.5%.

 

Kicking the trend is builders’ merchant Grafton Group [GFTU], which has risen 27% in the year-to-date to 817p as of Tuesday’s close.

The Irish business has been able to benefit from the geographical spread of its business. In its most recent full-year results, it reported operating profit growth of 25% in Ireland and 27% in the Netherlands, compared to 14% in the UK. As many of the company’s brands – such as Leyland and Buildbase – also cater to the home renovation market, it is able to generate revenue beyond construction contractors.

 

Will there be growth?

Investors in Kier and Balfour will be desperately searching for signs of growth. 

The forward picture is not good for Kier: its P/E ratio is currently sitting at 3.68, drastically lower than the industry’s 16.78 and the sector’s 23.7, suggesting investors are not anticipating any significant growth in the near future. Its return on investment (TTM) at 1.37 is also lagging behind the industry’s average of 6.12.

 

Market cap£175.33m
PE ratio (TTM)3.68
EPS (TTM)29.40
Profit margin0.69%

Kier share price vitals, Yahoo finance, 04 July 2019

 

On 17 June, Liberum analyst Joe Brent drastically slashed his target price from 320p to 150p, saying “a price-earnings ratio of 2.2 times is clearly discounting a lot of bad news. However, there is much to be concerned about”. 

The picture is somewhat more hopeful for Balfour: Refinitiv consensus survey shows that analysts are exclusively recommending the stock as a “buy”, and while the company’s full year earnings report, released in May, showed total revenues were down 5.4% from the year previous (from £8.3bn to £7.8bn), the company has grown its dividend per share by a third, from 3.6p in 2017 to 4.8p. 

Writing for Motley Fool in March, Rupert Hargreaves says Balfour has “attractive income qualities”. 

“For the past few years, this construction giant has been through a lengthy restructuring process, and it looks as if the hard work is starting to pay off,” he adds. “For 2018, net income hit £135m, up from a total loss of -£206m in 2015. The City is expecting more of the same in 2019.”

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