Is the Balfour Beatty share price undervalued?

Balfour Beatty shares rose last Wednesday after the UK’s biggest construction company unveiled a 42% year-on-year jump in full-year underlying profit, to £279m. The FTSE 250 stock has also been boosted by a number of recent contract wins, including two coastal defence projects in Wales. But are Balfour Beatty shares undervalued? 

Balfour Beatty’s [BBY] share price rose 6.93% to 364.20p intraday on Wednesday 15 March, after the UK’s biggest construction company unveiled a 42% year-on-year jump in full-year underlying profit, to £279m. The group also increased its dividend by 17% to 10.5p per share.

The FTSE 250 stock has been boosted by winning a number of lucrative construction projects in recent weeks, including two coastal defence projects in Wales worth £97m, and a £17m project to repair a bridge near Edinburgh.

With this slew of positive news, investors might reasonably question whether Balfour Beatty shares are undervalued. Indeed, the consensus opinion from analysts supports that view.

How has the BBY share price been performing?

Balfour Beatty shares dropped back from that intraday high last Wednesday, closing up 2.17% on the day, before closing the week down -3.70% at 333.20p. Looking longer term, the stock is up an impressive 24.45% over the last 12 months, boosted by a profit forecast upgrade in December.

The shares currently stand at -11.71% from the 52-week high of 377.40p reached on 30 January, and 43.25% above the 52-week low of 232.60p recorded on 9 May 2022.

UK arm helps revenue and profit rise

Balfour Beatty reported an 8% rise in revenue to £8.9bn for its 2022 financial year, with pre-tax profit jumping from £87m to £287m. Its UK construction division was the catalyst of this, after underlying profit came in at £59m, boosted by work on HS2, the Thames Tideway, and a nuclear power station at Hinkley Point, Somerset. Its order book is up 8% year-on-year, to £17.4bn.

Announcing a £150m share buyback and a 17% increase on the proposed dividend to 10.5p, CEO Leo Quinn said: “The board’s confidence in both the short and longer term is reflected in its commitment to a multi-year programme of strong shareholder cash returns.”

Broker Jefferies was impressed with the report and Balfour Beatty’s outlook, saying the company “remains in a strong demand environment, with a de-risked order book, supporting steady cash returns”.

Recent projects and construction activity

Balfour Beatty continues to boost its order book, after last week’s confirmation of a deal on two coastal defence schemes for Denbighshire County Council in Wales, worth £97m. Balfour Beatty will replace original sea walls and construct a new rock armour defence in Rhyl, as well as creating a new coastal erosion embankment on the Prestatyn coastline. The schemes will help prevent flooding and coastal erosion, and protect more than 2,500 local homes and businesses.

Balfour Beatty also recently confirmed it is to build a pedestrian and cycle crossing in Nottingham, for Nottingham City Council, and replace part of a listed bridge across the Firth of Forth near Edinburgh, in a deal worth £17m.

In January, the group announced a couple of significant contract wins: the Lower Thames Crossing, involving the design and delivery of 10 miles of new roads, worth £1.2bn; and a £90 contract with Fife College, for the design and construction of a new learning campus in Dunfermline, Scotland.

Are Balfour Beatty shares undervalued?

The launch of a third share buy-back scheme in three years certainly sends out a sign of confidence in its growth prospects, and analysts at Simply Wall St. reckon the stock is undervalued, in view of the company’s “excellent balance sheet”. Not only is Balfour Beatty trading at good value compared to its peers and the wider industry, it is trading at 37% below their fair value estimate.

This bullish view is supported by Morningstar’s quantitative equity research, which indicates that the current Balfour Beatty share price undervalues the stock at a 16.07% discount, compared with its fair value estimate of 397.00p.

Analysts upbeat on BBY share price prospects

Investors Chronicle recently upgraded its rating on the stock to ‘hold’, thanks to the company’s forward guidance, but they urge caution over the possible threat of UK policymakers pulling back on infrastructure spending. They note that the UK government is responsible “for a large chunk of its revenue stream”, even taking into account Balfour Beatty's significant overseas operations.

Among the eight analysts offering 12-month price targets with the Financial Times, Balfour Beatty shares have a median target of 400.00p, with a high estimate of 475.00p, and a low estimate of 230.00p. The median estimate represents a healthy potential upside of 20.05% versus last week's 333.20p close.

A consensus ‘buy’ recommendation among five of the eight analysts polled by the Financial Times supports the median price view, while the other three analysts have an ‘outperform’, ‘hold’, and ‘underperform’ recommendation, respectively.