Share tip of the week: cash in on infrastructure spending
By
Paul Hill Oct 02, 2009
Print this article
You can't accuse Balfour Beatty of resting on its laurels. In the past month, Britain's biggest building contractor has bagged £500m in orders, including a £150m contract from Hong Kong University and a £252m deal to build a highway in Texas. Its order book is worth £12.5bn, providing great earnings visibility.
But what really caught my eye was an acquisition in the design sector earlier this month. Balfour has snapped up US engineering consultant Parsons Brinckerhoff on the cheap for $626m. That's a 20% discount to the sector, equating to a bargain of six times earnings before interest, tax, depreciation and amortisation (Ebitda).
But the keen price tag is just part of the story. The deal will create one of the world's largest full-line construction providers, with particular strength in transportation and energy infrastructure. This is key, because the desperate need for new investment in roads, rail, water and power systems both here in the UK and abroad is undisputed. The only sticking point is project funding – after all, governments have just spent trillions bailing out the banks.
Balfour Beatty (LSE: BBY), rated a BUY by Bank of America
The solution is to use private-sector money instead by awarding long-term (say, 25-year) design, building and operating contracts to groups who later charge the users (via tolls, for example) of the facilities. What's needed is an organisation that is large enough to manage all the work along with having the financial muscle to bear the necessary contractual guarantees. By beefing up its design skills, Balfour will be able to grow faster than its smaller rivals by winning a bigger share of these blue-ribbon orders.
The deal also helps Balfour achieve its goal of becoming more geographically diverse. Turnover is set to be derived 40/40/20% across Europe, North America and the rest of the world by 2011. Excluding the impact of Parsons, 2009 revenues and underlying earnings per share (EPS) are seen coming in at £9bn and 38.9p respectively. The group is expected to end the year with around £200m of net cash and paying a 13.5p dividend. That puts the shares on a p/e of 8.5, and paying a secure 3.9% yield.
What could derail the shares? There are the risks inherent in the industry, such as poorly priced contracts, non-performance, fines, customer bankruptcies and/or cutbacks in public spending. Then there is foreign exchange and integration risk from the Parsons deal. Lastly, the £427m pension deficit (net of tax) needs to be watched, although actions have already been put in place to cut this by £115m. But with one of the most widely respected brands in the sector and a solid balance sheet, Balfour Beatty is well placed to benefit from future infrastructure spending.
The deal is being funded via a £353m 3-for-7 rights issue at 180p, with the shares set to trade ex-rights on 5 October.
Recommendation: BUY at 322p and take up the rights
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
Published in
Tips & advice
| More
articles
by
Paul Hill
Related articles
-
By Luca Serino, May 25, 2012
-
By Paul Hill, May 25, 2012
-
By Paul Hill, May 25, 2012
-
By Phil Oakley, May 25, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.