Leo Quinn, Balfour Beatty plc’s (LON:BBY) chief executive has imposed stronger bidding discipline at the contractor, helping the FTSE 250-listed firm return to profit in the first half of 2017.
In his statement accompanying Balfour Beatty’s half-year numbers today, Quinn – who in 2015 rejoined the company he started his career at 35 years previously - said: “Under stronger leadership and much improved bidding disciplines, the businesses are booking new orders at improved margins and reduced risk.“
He added: “Our infrastructure pipeline in the US and UK remains buoyant and the Group continues to win landmark contracts such as the Dallas Southern Gateway and HS2.”
READ: Balfour Beatty shares up as it posts return to first half profit led by recovery in UK construction business
In post-results comment, Neil Wilson, senior market analyst at ETX Capital pointed out: “Bidding discipline is paying off for Balfour Beatty.”
The analyst added: “Construction is all about margins and bidding too aggressively for work cost Balfour dearly for a couple of loss-making years in which it delivered seven profit warnings.
“Now it’s a lot more selective and as a result says it’s on course to achieve industry-standard profit margins by the second half of 2018, which is 2%-3% in the UK and 1%-2% in the US.”
Wilson noted that Balfour Beatty’s UK construction business is improving, having swung to a profit of £2mln in the first half from a loss of £69mln a year earlier, on “pretty slender margins” of 0.2%.
He pointed out that Balfour Beatty’s US business, which is twice the size of the UK, delivered underlying operating profit margin of 0.9%.
The analysts said: “Chief executive Leo Quinn can confidently proclaim it’s nearly there. Rising from 2% in 2016 to 3.1%, Support Services is already hitting the industry standard margins of 3%-5%.
“The order book is down 8% due to this more discriminatory approach but worth noting that this is yet to include the two HS2 Lots it won with Vinci, which combined are worth £2.5bn.”
Wilson concluded: “Indeed it looks like there is more to come from Balfour.”
Strategy is sensible and progress is being made
Meanwhile, Nicholas Hyett, equity analyst at Hargreaves Lansdown, commented: “Stage one of Leo Quinn’s ‘Build to Last’ turnaround strategy had the group slimming down to focus on a few core areas of expertise. Now that’s complete, the group is focused on restoring margins in those areas to something resembling the industry norm.”
The Hargreaves Lansdown analyst added: “Evidence at the half year stage suggests Balfour is making headway. Margins are heading in the right direction, and while the order book is shrinking, the group attributes that to being more selective in the projects it undertakes. Given that several of historic contracts have proven loss making, that’s welcome.”
“However,” he said, “while the strategy is sensible and progress is being made, there’s still some way to go before Balfour is in rude health - the final phase doesn’t even get started until 2019.”
But, Hyett concluded: “When it’s all over, Balfour could prove a nice little earner for investors, for now though Build to Last is Here to Stay.”
And, in a post-results note to clients, analysts at Numis Securities said: “Balfour Beatty offers the best recovery story coupled with balance sheet strength in the sector and we believe upside risks to numbers should be progressively expected going forward as management actions become ever more tangible.”
They repeated a ‘buy’ rating and 350p price target on Balfour Beatty shares, which in late morning trading were up nearly 7%, or 18.2p at 280.7p.