Solid foundations with this construction stock

This construction firm built its defences early on to weather the fallout from Britain's austerity measures. And now it's well-set to shelter your portfolio over the long-term, says Paul Hill.

2. Balfour Beatty ( LSE: BBY ), rated a BUY by Goldman Sachs

It's taken time, but the government's spending cuts are now getting into full swing. That's good news for the nation's deficit, but bad news for infrastructure providers such as Balfour Beatty.

Fortunately, the construction firm's board saw this coming early on, and has been actively beefing up its overseas operations in places like the US, Asia and Australia. It has also been diversifying its product line into areas where it can bolt profit-boosting ancillary services on to existing construction contracts. This focus on higher margin work such as design projects and maintaining infrastructure has helped Balfour to cushion the affects of Britain's austerity drive. Indeed, in the first half of the year, the order book rose by 8% to £15.5bn. That was thanks to the renewal of a facilities management agreement with the Royal Mail, and several other chunky public sector deals with schools and emergency services.

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In August the firm bagged a blue-ribbon street-light contract with Northampton County Council. The 25-year concession is worth £230m and will involve the design, installation and repair of 46,000 lamp-posts and 11,000 signs and bollards.

Better still, the Australian division, which is being boosted by Asian demand for natural resources, remains buoyant. There are also some exciting opportunities in the Middle East, most notably in Qatar, Kuwait and Saudi Arabia, where infrastructure is being funded by petro-dollar windfalls derived from the elevated oil price.


Looking forward, challenging domestic and US markets will be partly offset by growth in developing economies. Chief executive Ian Tyler says that, although short-term results are unlikely to blow the doors off, medium-term conditions should see substantial improvement. His confidence is based on the huge numbers of crumbling roads, bridges and power systems that need to be fixed globally. For instance, last year the US Army Corps of Engineers gave America's infrastructure a D grade. Data from the US Bureau of Transportation shows that in California alone 28% of bridges are deemed "structurally deficient and/or functionally obsolete".

Moving to the numbers, the City is forecasting 2011 turnover and earnings per share of £9.3bn and 35.3p respectively. That puts the shares on a skinny price/earnings (p/e) ratio of 7.1 with a hefty 5.1% yield. However, I value Balfour on an EBITA multiple of eight. Adjusting for the £240m pension deficit, £150m of preference shares, net cash of £296m and private-finance initiative assets worth £682m, that generates an intrinsic worth of 385p a share.

What could upset the apple cart? In short, poorly priced contracts, the economic cycle, foreign-exchange fluctuations and/or further cut-backs in public spending. Nonetheless, this industry should be a winner over the long-term. The continued need for modern transportation, clean water, waste management and energy is increasing everywhere. Goldman Sachs has a target price of 415p.

Rating: BUY at 250p

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.