Can a company be unfairly tarnished by the sector it is in? The answer is almost certainly yes, particularly if the label is loosely applied. Whether it is the case with Balfour Beatty and construction, however, is a matter for debate.
Balfour Beatty was founded in 1909 by George Balfour, an engineer, and Andrew Beatty, an accountant. It operates three main divisions: construction, support services and infrastructure investments. Its main markets are Britain, the United States and Hong Kong, where it operates a joint venture with Jardine Matheson called Gammon.
The company has about 26,000 staff worldwide, is a constituent of the FTSE 250 index and in its most recent financial year had a pre-tax profit of £181 million on revenues of a little more than £7.8 billion.
It is often described as Britain’s biggest construction company but Balfour Beatty is at the sophisticated end of the sector, providing finance, design, project management and support services as well as building projects such as roads and railways.
It has been transformed under its chief executive, Leo Quinn, who joined the company when it was loss-making, unable to pay a dividend and mired in unprofitable contracts. Mr Quinn, 62, has turned it into a much more efficient business that pitches only for viable contracts and with margins that are in line with the industry — between 2 per cent and 3 per cent. More than half the group’s business comes from overseas, mainly the US.
Construction is at the heart of Balfour Beatty’s work, accounting for 80 per cent of its revenues in the first half of the year. Support services, which includes upgrade contracts and maintenance, account for a little less than 13 per cent. Infrastructure investments, effectively a portfolio of legacy schemes that are being sold or run off, generate the remainder.
The backdrop for UK construction doesn’t look good. This week the latest monthly survey of purchasing managers in the sector by IHS Markit and the Chartered Institute of Procurement & Supply showed construction continuing to shrink this month and the rate of new orders falling at its sharpest rate since March 2009. Brexit, and the prospect of no-deal, is effectively putting all schemes on hold.
In the US the picture is more mixed. A recovery in public sector construction is offset by a private sector decline.
Balfour Beatty’s order book, which stood at £13.2 billion at the end of June, provides some reassurance. Having stagnated during the second half of last year, forward orders rose by £600 million during the first six months of this year, driven mainly by US contract wins.
The group has clear sight of business for at least the next four years, including work on the Dumbarton Rail Bridge spanning the San Francisco Bay in the US, and on the Lower Thames Crossing linking Kent and Essex in Britain. Despite Balfour Beatty winning slots on £3.5 billion of planned works on the HS2 rail link, it has been left off the order book, which would improve substantially if the project went ahead.
When this column looked at Balfour Beatty in January it recommended avoiding the shares, mainly because of the perils of the construction sector. The group has strengthened but the sector has not.
The shares, at 265¾p in January, were 2p or 0.9 per cent higher at 222½p yesterday, making for a drop in the interim of a little less than 16 per cent. The stock is valued at 9.7 times Numis’s forecast earnings for a yield of nearly 2.9 per cent. This business looks solid; unfortunately, its markets look shaky.
ADVICE Avoid
WHY Company has gone from strength to strength under its present management but the wider sector remains too unappealing
FDM Group
It is all too rare to find a public company run by a husband-and-wife team, let alone one where the founder is still in charge, but that is the case at FDM Group. The IT services businesses was created in 1991 in an attic in Brighton by Rod Flavell, 61, who remains its chief executive. His wife, Sheila, 63, is the company’s chief operating officer.
FDM has been listed twice during its lifetime. First, in 2005, it joined the junior Aim market, where its shares traded until 2010. Then FDM was taken private by Inflexion Private Equity, which relisted it in 2014. The company is now a constituent of the FTSE 250, with annual revenues of £245 million and a market value of £837 million.
The business model is intriguing. The group recruits IT experts, often graduates but also parents returning to work and former military personnel, puts them on a 12-week training course and then installs them as consultants among its clients. These consultants provide a range of services, including maintenance, systems integration, special projects and the like. After working at a given business for two years they are offered the option of staying with FDM or working for the client full-time.
Traditionally, FDM’s customers have tended to come from financial services and they include HSBC, Deutsche Bank and Aviva. It has been pushing its activities in other areas too, including work for the public sector and in energy, media and entertainment. FDM has also moved into new geographies, such as Canada, Singapore, the Netherlands and Austria, diversifying its exposure away from the UK.
Its contracts with the government, worth 10 per cent of revenues, mean FDM’s fortunes are linked to Brexit and it said at its half-year results in late July that there had been a fall in demand from Whitehall. Uncertainty had mounted, it said, not just over the terms of Britain’s exit but over who would be prime minister.
The shares, up 1p to 767p, have fallen 11.5 per cent since the last update on trading, which feels like an overreaction. They are valued at just over 20 times Investec’s forecast earnings for a yield of 4.5 per cent. It’s tempting.
ADVICE Buy on weakness
WHY Growing company with interesting model whose shares are overly punished
