Balfour Beatty benefits after Carillion’s demise | Business News
It is an ill wind that blows nobody any good and the collapse of Carillion last year appears to have had some positives as well as negatives.
The biggest positive is that public sector and outsourcing contracts are now being priced more realistically – lowering the risk of companies like Carillion and Interserve, the latter of which is fighting for its life, from bidding unrealistically low prices to do such work in the future.
One of the beneficiaries of this appears to be Balfour Beatty, the infrastructure services giant, which today published its results.
Full year pre-tax profits on an underlying basis rose by just under 10% to £181m, better than expected, while the dividend to shareholders has been increased by a third.
The shares have risen by 3% in early trading.
One of the key measurements to which investors look, the order book, increased by 11% to £12.6bn.
A contributory factor to that has been more normal pricing.
Leo Quinn, the chief executive, said the company had been more disciplined in the work that it had bid for and had sought to raise its profit margins in those bids as well as focusing on projects where it could deliver results at a lower risk.
He added: “We have benefitted in our order book from Carillion’s collapse but that’s a function of us being a higher quality company and the low price bidder not being there in the market anymore.”
But this is not an overnight phenomenon.
The backdrop to these results is that, for several years now, Balfour Beatty has been taking a more disciplined approach to the work that it takes on.
When Mr Quinn, a turnaround specialist, arrived at Balfour Beatty in 2015, after spells running the banknote printer De La Rue and the defence technology group Quinetiq, he launched a programme called ‘Build to Last’, the aim of which was to ensure the company was put on a more sustainable footing.
That may sound like meaningless corporate-speak but was, in fact, essential.
At the time of Mr Quinn’s arrival, Balfour was in a parlous state, having issued a string of profits warnings and which, ironically, at one point led to it having to fend off a takeover approach from Carillion.
Most of the problems were in its UK construction services division, the activity with which most people associate Balfour Beatty, which – in common with the likes of Carillion – was riddled with loss-making contracts.
Between 2013 and 2016, the division had racked up an astonishing £778m worth of losses.
No fewer than 89 of the division’s contracts were revealed to be loss-making, one of which was a joint venture to build the Aberdeen Western Peripheral Route, a key contributor to Carillion’s woes.
So the new man made it a priority that the contracts Balfour Beatty bid for would genuinely be profitable.
There would be an end to chasing contracts just for the sake of growing sales.
Mr Quinn also targeted cutting the company’s debts and simplifying Balfour’s structure which, as he noted a year later, was that of a loose federation of 14 divisions “doing their own thing, running their own business, having full capability all the way from selling through to almost managing their own pensions”.
“We had 14 IT directors, just by way of an example,” he said. “It was clearly a nonsense, was unsustainable and unaffordable”.
Nowhere can be the improvement be seen more clearly than in UK construction.
Today’s results revealed that Balfour Beatty raised profits in UK construction last year by 75%, to £28m, although the division is by no means the company’s largest or most important.
The company’s profit margins across the business are now what Mr Quinn describes as “industry standard”.
Another key priority was improving the company’s safety record and engaging better with its 26,000 employees worldwide.
This sounds fluffy stuff but, in a field like engineering where there are huge skills shortages, is going to be vital.
Mr Quinn said: “In the future, our issues are not going to be about market growth, they’re going to be around having the talent and the capability to deliver on the projects, which is going to demand that we are more selective, but it means that we have to hire, train and retain the best people – so making this a great place to work and being the sort of Google of the infrastructure industry is really our goal.”
A key financial priority, meanwhile, was getting to grips with the company’s debts.
Mr Quinn recalled: “We used to be, on average, £400m overdrawn four years ago – on average, we’ve got around £200m in the bank today.”
Get right the fundamental running of the business and there are lots of opportunities.
Balfour Beatty is now focused on three major infrastructure markets: the US, the UK – where it is involved in the High Speed Two rail link, the third runway at Heathrow Airport and the Hinkley Point ‘C’ new nuclear power plant – and Hong Kong.
Countries like that are crying out for improvements in infrastructure, in fields such as transport and energy, so there should be plenty of scope for further growth.
But that must involve ensuring that the company, which was founded 110 years ago by engineer George Balfour and accountant Andrew Beatty, continues to sign contracts on sensible terms.
As Mr Quinn put it: “Build To Last has always been about how to build a sustainable platform for the next 100 years.
“This is not a sprint, this is a marathon. This is about building a company for the future.
“There’s no quick fixes for this business because the types of projects we engage in are very long-cycle.”