BofA Merrill Lynch ups Balfour Beatty to 'buy', cites confidence in margin recovery

Balfour Beatty got a boost as Bank of America Merrill Lynch upgraded the stock to 'buy' from 'neutral' and lifted the price target to 345p from 295p, citing improved confidence in US, UK and Hong Kong margin recovery.

In addition, the bank pointed to hidden value in the public-private partnership assets, balance sheet optimisation and potential favourable tax regime changes in the US.

"Balfour has undergone a significant transformation since the arrival of new management in early 2015. The group has stepped-up efficiency efforts, taken £124m out of its cost base, exited some activities (i.e., engineering services for external clients) and overhauled its order selection, monitoring of project execution and cash management.

"The US construction outlook has improved, and while Brexit casts a shadow on the UK, the pipeline of infrastructure projects could provide an offset," the bank said

It argued that PPP assets are still the core, with the company's internal valuation of the PPPs standing at £1.2bn at December 2016, but said they remain underappreciated.

Merrill also highlighted potential upside from US tax reform, saying that if the corporate tax rate were to drop to 20% from 35%, this would imply an £11mn net income benefit for Balfour Beatty in 2018E, or an 8% earnings per share uplift for the group.

At 0847 BST, the shares were up 6.7% to 288.63p.