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Balfour Beatty: 5 things we learned from its results

Leo Quinn was notably relaxed in front of analysts today – even smiling at one point – as he unveiled the work he is doing to steer Balfour Beatty’s continued turnaround. 

It’s understandable that the former civil engineer was on good form.

As Mr Quinn admitted today, when asked about Carillion on the BBC, it was only three years ago that Balfour had its own “near-death” experience. Bear in mind, too, that the firm also faced down a takeover attempt by Carillion in 2014.

Now, Balfour is bullish and today unveiled an impressive jump in annual profit, underlined by a healthy balance sheet.

But what else did we learn about the UK’s largest contractor? 

UK construction: Back in the black and margin on track

The focus on margins in UK construction has intensified since the media spotlight fell on Carillion’s collapse. 

Balfour today said it remains set to hit “industry standard” margins in UK construction of 2-3 per cent by the end of 2018. Its UK construction division also bounced back into the black, with operating profit of £16m compared to a £65m loss in the prior year.

However, as ETX analyst Neil Wilson noted, there is “still some work to be done”.

Full-year UK margins for 2017 came in at 0.8 per cent, up from 0.2 per cent in the first half of the year. “The target of 2-3 per cent may be tough to achieve as planned in the second half of 2018,”  Mr Wilson said. “Nevertheless the trajectory looks promising.”

Balfour’s margins are likely to be helped as it says it remains committed to taking cost out of the business and “raising productivity”.

In the long-term it is still targeting margins of 5 per cent as Mr Quinn has previously said current industry margins are unsustainable.

Of the 89 legacy contracts that caused Balfour problems, 93 per of these are now at “practical completion”, the firm said, while “over 80 per cent” are at financial completion.

Aberdeen woes coming to an end… hopefully

The £550m Aberdeen Western Peripheral road project hit the headlines in the wake of Carillion’s collapse. The failed contractor was a JV partner with Balfour and Galliford Try on the scheme, which has been beset by a host of problems.

It was notable today that Balfour CFO Phil Harrison dedicated a whole slide to the project in his presentation to analysts.

Aberdeen Western Peripheral Route Balmedie-Tipperty project AWPR_Tipperty Junction Beam Installation Nov 15 1

Aberdeen Western Peripheral Route Balmedie-Tipperty project AWPR_Tipperty Junction Beam Installation Nov 15 1

The good news is that the 58 km dual carriageway should finally be completed this summer. Balfour had already announced that it was taking a £44m hit on the project due to Carillion’s failure, which it confirmed today.

Mr Quinn said he expected to make claims over the project, but this will be a long-term effort as the claims have to be “justified and explained”, he told analysts.

Carillion-cloud silver linings

Speaking to analysts, Mr Quinn put a positive spin on the fact that Balfour has taken on 150 Carillion staff across three different JVs, one of which is believed to Aberdeen.

The staff are “experts in infrastructure and roads and add to our talent pool”, he said. He highlighted the fact that “a really capable person” could add half-a-million pounds of revenue a year. “If you add that all up to a revenue stream that’s a really attractive business we’ve managed to acquire,” Mr Quinn said.

The Balfour boss earlier told the BBC he believed Carillion’s collapse was due to a “failure of leadership”. 

Hefty 2018 order book 

There’s no doubting Leo Quinn has done an impressive job in turning around Balfour with his Build to Last initiative. 

Mr Quinn, who boasted to CN that Balfour has the industry’s strongest balance sheet, said cash remains the firm’s “most important” financial barometer. Net cash at the end of last year stood at £335m, compared to £173 the prior year. Net debt also fell from £160m in 2016 to £73m last year. The firm also has assets of £1.1bn. 

Though the group’s order book fell 8 per cent to £11.4bn, Balfour said this is due to it being more selective in its bidding.

“The target of 2-3 per cent may be tough to achieve as planned in the second half of 2018. Nevertheless the trajectory looks promising”

Neil Wilson, ETX

Speaking to analysts, Mr Quinn flagged that it is currently bidding on a potential £11bn worth of projects, including further work on HS2 and at Old Oak Common.

“Assume that you get half of that, that’s £5bn over 10 years; that’s £500m a year,” he said.

Investors today intially appeared to agree with Mr Quinn’s positive take as shares jumped 9p, but the market’s enthusiasm for Balfour stock wore off slightly this afternoon.

However as Applied Value analyst Stephen Rawlinson said: “We suspect that the market is underestimating the extent of the turnaround at Balfour Beatty. The share price had a good run into these numbers and it may be that with the 2 per cent rise to 282p today it has paused for breath.” 

Eyeing more US gains

It’s worth remembering that Balfour books more than half (55 per cent) of its construction revenue in the US. However the firm’s profit margin in the US last year was a disappointing at 1.1 per cent, which Balfour admitted is the “lower end” of its 1 to 2 per cent target. This is thought to be because the level of risk is lower in the US than the UK.

Nevertheless, things should improve on this front as the firm becomes more selective in its bidding. The results today did not include a chunky £1.4bn JV contract Balfour was awarded in January to build a new train system at LAX airport.

Factor in President Trump’s $1.5tn infrastructure plan and Balfour Beatty looks well placed to hoover up more US work.

Readers' comments (1)

  • its quite creative to take the Aberdeen loss off balance sheet to make UK construction look like it made money, it did not!!!

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