Profits soar as UK Construction rebounds

In the first half, underlying revenue was down 4%, when excluding the impact of exchange rates, to £4.1bn. An increase at Construction Services was offset by the expected decrease at Support Services.

A return to profitability for UK Construction helped underlying operating profit rise 42% for the wider business, to £85m.

Full year guidance for Support Services has been upgraded, with industry standard margin now expected at the top end of the previous 6-8% range. Profit from investment disposals is now expected to be in the range of £55 to £65 million.

The board have recommended a 3.5p dividend, a 17% from last year. The latest tranche in the multi-year share buyback programme, of £150 million for 2022, is underway and expected to complete during the year.

The shares rose 8.6% following the announcement.

Our view

First half performance was dominated by the return to profitability of the UK Construction segment which had been hit hard by the pandemic. Though it was more than simply a recovery, profit managed to end up slightly ahead of pre pandemic levels.

We’re pleased to see margins creeping back up to more normal levels too. Even in the good times margins in the construction sector are pitifully thin. An operating profit margin of 3% is pretty impressive in the UK, while in the US as low as 2% is good going. Such low margins leave little room for error.

Some of the group’s private sector property projects, which went wrong due to the pandemic, were a drag on profits. No one saw the shutdowns coming, but Balfour’s now become a little choosier about its private-sector work. That’s particularly true in the UK, where the public sector makes up roughly 90% future orders.

Selecting contracts where the group has expert knowledge along with longer contracts reduces risk, and the order books now growing with higher quality. Infrastructure spend is a key priority in the US and UK, which should provide support for large construction groups.

Low margins mean inflation has the potential to upset progress moving forward. But while construction and support services need to mitigate the impacts, the investment portfolio is a benefactor. Both the UK and US portfolios are positively linked to inflation, which helps the wider group offset the challenges in other areas.

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