This is not to detract from the work done by Leo Quinn and his team since he arrived as chief executive of Balfour Beatty in January 2015, but the work that needed doing was pretty obvious. The contractor and support services specialist had carried out 45 acquisitions over the past decade.
It had a bloated cost base and was locked into several contracts that were never going to be profitable and was leaking cash.
Two years on, most of those problems have been turned around. Various bits outside the UK and US have been or are being sold, leaving Balfour Beatty focused on those two markets, with the exception of a joint venture in Hong Kong. Costs have been cut and management reorganised. A target of £100 million in cost savings has been exceeded by £23 million.
The cash position has been turned around — the company has £173 million net cash, needed, because as a contractor, it has to fund much of the work before payment. A targeted £200 million cash inflow has turned out to be £493 million. Some of that has been funded by the sale of portfolio infrastructure investments, netting £160 million over the two years. That net cash position means that the company can be much more selective over future sales, selling at the right time or hanging on for the income. Meanwhile, of those legacy problem contracts, 90 per cent are finished and the cash is in from 70 per cent.
The job over the next two years is to rebuild margins to where they are elsewhere in the industry. The target is of 2 to 3 per cent in UK construction and 1 to 2 per cent in the US, where the work is lower risk. Support services, the side that needed the least operational improvement, is targeting 3 to 5 per cent and is at the bottom end of that range.
In all this, the 2016 figures are hardly relevant, although UK construction scraped into a tiny profit in the second half and the group reported a £60 million underlying profit against a £123 million loss.
The shares, off 12¼p at 271½p, are hard to value because of that £1.2 billion portfolio of investments, an earnings multiple of 14 this year not reflecting the real picture, but they look worth it for the long term.
My advice Buy
Why The recovery plan has largely been implemented and an improvement in margins from here on should push up the share price
Emis Group
Software producers, once their core products are mature, have a choice. They either use their typically strong cashflow to return capital to investors or strike out to find the next product, potentially a riskier path. Emis is a niche player providing software for NHS surgeries and pharmacies; its Emis Web product is now used by 55 per cent of the target market and further expansion is limited.
Pharmacies allow some more growth, a contract with the Lloyds chemist chain meaning market share should reach 50 per cent and could go further. A move into child, community and mental health has taken longer than expected, which has had an impact on the share price — Emis has tended to trade on a high multiple as a tech stock.
Patient.info, the latest product, which allows access to various services, could achieve revenues of £50 million by 2021 but the £7 million investment needed appears to have spooked the market and the shares fell 7p to 878p. Operating profits for 2016 were up by 6 per cent to £38.8 million. The shares sell on a more reasonable 17 times earnings and look like decent value again.
My advice Buy
Why Fall in share price looks like a buying opportunity
Onesavings Bank
Shares in Onesavings Bank have been rising sharply in the run-up to publication of last year’s results and there must be a suspicion that the peculiar approach by private equity for Shawbrook, another bank that has come to the market lately serving small business customers, may have something to do with this.
A similar bid for Onesavings looks implausible, not least because on one measure the bank is highly valued. It mainly serves investors that want to get into buy-for-let properties, with a small sideline in the commercial sector. The loan book grew by 20 per cent last year, disregarding one disposal, to £5.9 billion. Further growth in the mid-teen digits is in prospect this year.
Its cost-to-income ratio, a measure of efficiency, is 27 per cent, among the best in the sector because its model is to deal with potential customers through IFAs and other intermediaries. Return on equity is 29 per cent, off a touch because of the new bank tax surcharge.
Although there was inevitably some disruption after the referendum, Onesavings says there is no sign of a decline in consumer confidence and the pipeline of potential work is good going into the first half, which suggests that growth figures will be met.
Underlying profits before tax were up by 29 per cent to £137 million, and the shares, off 15½p to 403¾p, sell on about 11 times earnings, which is not expensive. However, the shares are also on rather more than twice book value, a measure the bank tends not to use. That makes it look a bit pricey.
My advice Avoid
Why Valuation seems to have much of the growth built in
And finally . . .
Abcam is a Cambridge biotech company producing antibodies essential for medical research that has been championed here for some years. The shares were off by 4 per cent yesterday on overnight reports that President Trump was planning a $6 billion cut in funding to the National Institute of Health. A note from Numis Securities, the broker, points out that Abcam gets about 45 per cent of its sales from the US. As ever with such proposals from the new president, though, the question is whether it will happen.
