Investment Column: Balfour is cheap and US unit gives cheer
Wednesday 13 January 2010
Our view: Buy
Share price: 275.2p (-7.2p)
Investors in construction and infrastructure group Balfour Beatty got their fingers well and truly burned in 2008, but while the stock has yet to get close to the 420p of two years ago, the company is now on the mend.
Balfour yesterday announced new contracts with United Utilities and Anglian Water worth about £600m, with a spokesman for the group saying that the agreements are the sort of long-term, stable deals the company sees. Furthermore, Friday's trading update, according to UBS, should show solid 2009 trading", with all divisions except rail" reporting good numbers.
A further fillip for investors is last year's takeover of US support services outfit Parsons Brinckerhoff, which has increased exposure to the US: Balfour say it wants 40 per cent of turnover from across the pond, and the deal pushes the level above 30 per cent.
The problem for investors is that the group depends on government spending for about 20 per cent of its turnover in its biggest market, the UK. With the three main political parties falling over themselves to suggest post-election cuts, Balfour is likely to see to some contracts being scaled back, even though there will still be opportunities in markets such as water and nuclear.
While we think there may be pressure on the sector in general, we do not think that Balfour Beatty's stock, trading on a 2010 price to earnings ratio of 7.97 times, is particularly aggressively priced. In fact, on that multiple, it sits at a rather cheaper level than most in the sector. The dividend yield is also a very respectable 4.5 per cent.
We do not expect any nasty surprises on Friday, and while we have concerns for the wider sector, we reckon that parking your money in Balfour Beatty would be a sensible move for the long term, particularly given the shares' cheap valuation. So Buy.
Our view: Hold
Share price: 309p (+17.7p)
A year ago, IT outsourcer Computacenter said it planned to "focus the group's activities, reduce our operating costs and optimise our working capital". It seems to have paid off.
Computacenter put out an update yesterday for the year to the end of December, saying pre-tax profits would be "materially ahead" of the consensus expectations for £48.4m.
The company is now split 50:50 between providing contract services, such as day-to-day management of companies' IT, and professional services, which mainly deals with big-ticket projects such as data centres.
The contract services business has been particularly strong, and contracts were over £500m at the end of December, 7 per cent higher than the year before. Clients include BT, Marks & Spencer and Hays. Costs were cut by almost £30m, almost double last year's estimate, and exceptional items will be £1.5m less than predicted following the sale of the Trade Distribution Division in November.
It's not all rosy, as the group admitted. Revenues in the UK fell 11 per cent to £1.25bn, although there was growth in the fourth quarter. Professional services declined 11 per cent because of the lack of new infrastructure projects. But management believes the pipeline has improved and will improve further with the economy.
The group is trading on 12.2 times full-year forecast earnings. There could be more to come. However, while the update was positive, we worry that signs of recovery in professional services will take some time to translate to big contract wins. So at the current valuation level we say hold.
Our view: Hold
Share price: 794.5p (-3.5p)
Weir saw its shares touch a session low of 768p, down almost 4 per cent, after issuing a trading statement yesterday. The decline was pinned on the fact that the engineering group, which raised its full-year profit expectations on the back of a good fourth-quarter performance, held back from upgrading its outlook for 2010. The company cited a lower opening order book and uncertainty over the speed of the recovery. We'd point out that the intraday losses were as much a function of the company's caution as the market's optimism in the run-up to yesterday's statement. After all, Weir has rallied strongly since slipping to 669p in early December.
This is important. We like the company and are confident of its prospects – Weir has strong balance sheet, and is well placed to exploit an upturn in its end markets. But the shares seem pricey. They trade on a multiple of 15 times forecast earnings for 2010, according to Numis, and while a higher premium may be justified in the long term, given the company's own caution, they appear to offer limited upside in the short term. We think exposure to the shares is a good idea but would not wade in. Hold.
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