Peel Hunt upgrades Balfour Beatty, sees material outperformance

It said management has "materially de-risked" the investment case yet the shares have underperformed, albeit in a sector that’s out of favour.

Peel Hunt said the turnaround achieved by the leadership team has been "impressive", with key operating and financial milestones successfully delivered on time. It added that the developing platform for enhanced shareholder returns remains underappreciated given both the earnings per share progression and the sustainable free cash flow improvements.

"Our analysis suggests that medium-term earnings expectations are looking undemanding given the operational progress, beneficial mix shift and robust market backdrop. Moreover, the 'hidden value' within Infrastructure Investments and strengthening balance sheet suggest scope for enhanced shareholder returns over the medium term.

"We believe the shares look set for material outperformance - you may now remove your hard hat."

Peel argued that the mix shift to higher-margin work/attractive markets such as infrastructure, more defined risk metrics and a competitive advantage support earnings per share momentum as well as an implied re-rating.

Although the brokerage made no material changes to its estimates, which are in line with consensus, it reckoned there is more than 10% upside to its 2020 estimates for earnings before interest, taxes, depreciation and amortisation.

At 1440 BST, the shares were up 4% to 267.60p.