When the facts change, Leo Quinn says, so do the conclusions (Robert Lea writes). This paraphrasing of John Maynard Keynes, the economist, by the chief executive of Balfour Beatty is particularly apposite as his company, Britain’s largest construction concern, looks set to be one of the main beneficiaries of the Keynsian build-build-build infrastructure splurge being promised by the prime minister’s “new deal”.
Mr Quinn was responding to queries about his unexpectedly bullish claims in the group’s half-year results surrounding the business’s immediate future in the age of coronavirus. That is, to quote his prognosis: “Notwithstanding the uncertainty of Covid-19, on the assumption that Balfour Beatty’s markets continue to recover as anticipated, the group expects the earnings-based businesses to recover steadily through the second half and to report a more normalised operating profit in 2021, broadly in line with 2019.”
Again caveating Covid-19, he added: “With our capability and our balance sheet and the rising tide of infrastructure investment, the outlook could not be better.”
His argument is that if increased virus deaths start again, the response will be different as lockdowns will not be nationwide but localised, to keep the wider economy breathing.
Resilience is not a word usually associated with the construction industry at a time of economic dislocation. Yet Balfour’s £26 million loss in the first half of 2020 (it made £63 million of profit in the same period last year) gets pretty close to the definition. Those losses were in the UK, which was more heavily affected by site closures during lockdown compared with its American operations (43 per cent of the group’s £14.5 billion construction order book) and its Hong Kong business (14 per cent of the order book), both of which remained in the black.
Mr Quinn says that the Treasury’s job retention scheme — in which Balfour furloughed 3,000 of its 13,000 people in Britain — has provided a lifeline. The company has been able to retain its own personnel and subcontractors when in other recessions there would have been mass redundancies; and that enabled the company to retain net cash balances of more than £500 million in an industry where money can drain away fast. Thus Balfour can look forward to the £3 billion of work it will get stuck into building HS2 south of Birmingham and the construction of the giant Old Oak Common intersection in west London.
All this might look like a view through rose-tinted building site goggles when Balfour is loss-making, has scrapped its 2019 dividend, has passed on its 2020 half-year payout and is in an industry where a couple of blowouts can bring businesses to their knees. The volatile Hong Kong political situation needs to be factored in, too.
If the business does the business that Mr Quinn reckons it will do in 2021 and replicates 2019’s profits of £200 million, then — at yesterday’s share price of 257½p — it is trading at about 11 times next year’s earnings. If the annual dividends return to the same level of those of 2019’s (promised, then withdrawn) 6.4p, that is a yield of 2.5 per cent.
For some, an investment in Balfour Beatty is inextricably linked to Mr Quinn, who has made the company the contractor of choice of the big infrastructure spenders: Highways England. Network Rail and HS2. Though showing no signs of fatigue, Mr Quinn is tiring of being reminded he is 63 and has done five and half years at the company. He insists that he will be on site for a while yet.
ADVICE Buy WHY Investors are correct to be cautious about construction stocks, but they may be too wary of Balfour Beatty’s prospectse
Craneware
A U-turn generally is seen as being not a good thing, whether it is in politics or business (Greig Cameron writes). So what should we make of the handbrake turn executed by Craneware yesterday?
On Tuesday evening at 5pm, the provider of revenue monitoring software and analytics for the healthcare system in the United States said that it hoped to raise £80 million through a share placing to pursue several acquisitions. At 7am yesterday it told the stock market that it was abandoning the plan as its main target had been bought overnight.
It is understood that Craneware had to stop the placing as some conditions attached to it could no longer have been satisfied with that one big deal off the table. It noted that investors had backed the company with demand to place £83 million of shares at £15.50 each.
The rapid volte face is somewhat at odds with Craneware’s reputation for building steady and profitable growth. Its first products were launched in 1999 and Keith Neilson, 51, its co-founder, is still in place as its chief executive. Typically, more than 80 per cent of its revenue is recurring, with customers usually agreeing contracts of between three and five years to use its software.
It shares first rose above £10 in the summer of 2016 and peaked at more than £35 in the autumn of 2018. However, more than a third was wiped off the market value of the business in June last year when it said that sales had disappointed. They have seesawed since then, but having fallen below £14 in March were up by 47p, or 2.8 per cent, at £17.47 yesterday.
Craneware said yesterday that the pandemic had prompted American healthcare providers to look more closely at the financial and operational data they are generating. Alongside that, it highlighted several acquisition opportunities and its fundamentals appear solid.
The disruption caused by Covid-19 means that revenue is likely to be flat at about $71.4 million for the 12 months to the end of June, with underlying profit up slightly at $24.5 million. The interim dividend was lifted 5 per cent to 11.5p.
ADVICE Hold WHY There is room for the shares to recover further and it is in a growing market
