Energy Infrastructure Projects With National Grid And SSE Will Position For Future Success

Key Takeaways

• Strong backlog and focus on high-growth sectors like energy infrastructure position Balfour Beatty for long-term revenue and margin improvement.
  
• Strategic diversification and investment in digitalization enhance operational efficiency and support sustainable earnings growth, particularly in the U.S. market.
  
• Legal challenges, project shifts, low-margin models, reliance on subcontractors, and labor competition risk impacting Balfour Beatty's net margins, revenues, and profit growth.

Catalysts

Balfour Beatty plc finances, designs, develops, builds, and maintains infrastructure in the United Kingdom, the United States, and internationally.

• Balfour Beatty's £18.4 billion backlog and improved margin quality, especially with derisked contracts, are expected to provide significant revenue stability and growth potential. This visibility combined with ongoing improvements in profitability suggest stronger future earnings.
  
• The company's focus on high-growth sectors such as energy infrastructure, including power generation and transmission, is anticipated to drive future revenue expansion. Projects like those with National Grid and SSE, alongside strategic capacity investment like the pylon factory upgrade, position the company well for long-term revenue and margin improvement.
  
• Commitment to cultural and operational excellence, evidenced by improving employee engagement scores and a strong safety record, is likely to enhance productivity and reduce attrition rates. This operational efficiency is expected to further stabilize net margins.
  
• Investment in digitalization and early contractor involvement (ECI) initiatives is anticipated to reduce project costs and risks, thus improving net margins and profitability on future contracts, particularly in sectors like civils and construction.
  
• Strategic geographical and sectoral diversification, especially in the U.S. with strong buildings and civils businesses, offers a balanced portfolio that could sustain earnings growth. The anticipated recovery and expansion in the U.S. infrastructure market are likely to enhance earnings per share (EPS) through revenue and margin growth.

Balfour Beatty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Balfour Beatty's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 2.3% in 3 years time.
• Analysts expect earnings to reach £240.2 million (and earnings per share of £0.48) by about April 2028, up from £178.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 11.2x today. This future PE is greater than the current PE for the GB Construction industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 3.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

Balfour Beatty Future Earnings Per Share Growth

Risks

• The legal challenges and provisions under the U.K. Building Safety Act, alongside jury verdict issues in the U.S., could lead to unexpected financial charges and liabilities, potentially impacting net margins and overall earnings.
  
• The reduction in revenue at Gammon due to the completion of major Hong Kong airport projects and a shift to new work that might not match previous levels could affect overall revenue growth.
  
• The reliance on a low-margin business model in the U.S., which is contingent on subcontractors mitigating risks, may impact future net margins if subcontractors fail or if unforeseen liabilities arise.
  
• The high levels of investment and strategic focus required for U.S. and U.K. infrastructure, defense, and energy projects rely heavily on sustained market conditions and execution, where missteps or delays could impact projected revenues and earnings.
  
• The competitive demand for skilled labor, particularly in mechanical and electrical sectors, poses a risk of increased operational costs and potential project delays, which could impact net margins and profit growth.

Valuation

• The analysts have a consensus price target of £5.109 for Balfour Beatty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.8, and the most bearish reporting a price target of just £2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £10.6 billion, earnings will come to £240.2 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 8.9%.
• Given the current share price of £3.99, the analyst price target of £5.11 is 22.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.