Balfour Beatty's confidence increases on margins, debts

Balfour Beatty is "increasingly confident" of improving margins this year as it continues to win new business on better terms.

Amid the second part of a transformation programme under chief executive Leo Quinn, the construction group expects to be able to pay down debts next year, with year end net cash guided to be flat on the prior year's £173m. Average net cash for the year is expected to be around £40m.

The 2017 year end order book is expected to be "broadly in line" with the £11.4bn at the half-year stage, post the $57m cash disposal of US subsidiary Heery International completed in October.

This will mean the order book will be roughly 10% lower than the previous year as Quinn, who initiated his Build to Last transformation programme three years ago when appointed to arrest the group's six profit warnings in two years, has been focused on simplifying the group, cleaning up the balance sheet and improving the quality of contracts rather than focusing on volumes.

He said actions taken in the programme "have laid a solid foundation for long term profitable growth" and that he continued to focus on de-risking the business.

The proceeds from the Heery disposal, operating cash flows and expected future sales from the investments portfolio, put the FTSE 250 group "in an excellent position to pay down borrowings as they fall due in 2018".

Following on from August's first half results where Balfour swung to pre-tax profit of £12m from a loss of £15m last year has seen further fruits from its more selective bidding approach.

Further new business has been won in its chosen markets on terms and at rates which reflect the increased discipline over bidding and risk introduced by Quinn.

"The order book increasingly consists of projects bid and delivered under our enhanced transparency, governance and controls and I remain confident that the Group will achieve industry-standard margins in the second half of 2018," he said.

BBY shares had risen 1.1% to 275.1p by just after 1000 GMT on Tuesday,

Analyst George Salmon at Hargreaves Lansdown said the fact the group is striving to get margins "to the not-so-heady heights of 2-3% by the back end of next year shows the difficulties within the sector".

He added: "Historically, the challenge for the industry as a whole has been coping with the twin demands of costing up contracts well in advance, while bumping elbows with numerous competitors.

"Balfour’s new strategy adopts a quality over quantity approach. This will likely impact the order book, but with Carillion’s difficulties showing what can happen when bid discipline is relaxed, this feels like a sensible strategy.”

Noting that consensus forecasts point to around £15m of investment disposal profits in the full year, analysts at Investec said management were closing in on making some sales, so the figure could come out higher or as low as zero depending on timing.

The £12-15m represents circa 10-12% of full year operating profit.

"There are no surprises in the statement, which is positive given the challenges peers have faced in the UK this year," Investec said, with a nod to Carillion and Interserve.

"As FY18 approaches, management has more visibility on margins, and this appears to have driven more confidence in their target of achieving industry average margins in H2 FY18."