BALFOUR BEATTY PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 DECEMBER 2006
RESULTS
Balfour Beatty, the international engineering, construction, services and investment group, today announced pre-tax profits before exceptional items and amortisation of intangible assets for the 12 months to 31 December 2006 up 13% at £152 million (2005: £134 million). Adjusted earnings per ordinary share before exceptional items and amortisation were also up 13% at 27.3p (2005: 24.1p). Basic earnings per share stood at 21.2p (2005: 24.9p).
The Board recommends a final dividend of 5.2p per ordinary share, making a total dividend for the year of 9.1p (2005: 8.1p), an increase of 12%.
There were a number of exceptional items, the largest of which was a non-cash asset write-down taken at the half-year, resulting in a net exceptional charge after tax of £25 million (2005: £4m profit).
Pre-tax profit for the year (after exceptional items and amortisation of intangible assets) amounted to £125 million (2005: £141 million).
Operating cash flow was, once again, strong and in line with profits. Year-end net cash stood at £305 million (2005: £315 million), despite acquisition expenditure of £80 million, and before taking account of the consolidation of £21 million nonrecourse net debt held in PPP subsidiaries (2005: £14 million).
The year-end order book increased by 20% to £9.1 billion (2005: £7.6 billion), with over £1.0 billion of further work at preferred bidder stage.
OVERVIEW
It is pleasing to report another year of strong profit and earnings growth and of good progress in pursuing the strategic priorities which we set out last year, while maintaining the strength of our cash position.
We remain committed to the delivery of the reliable, responsible growth which our shareholders have enjoyed over recent years. We are very clear about what is needed to continue growing the business for the long term and have the proven management capability to deliver.
BUSINESS SECTOR PERFORMANCE
Building, Building Management and Services
Profit from operations before exceptional items and amortisation of intangible assets in the building sector improved by 23% to £43 million (2005: £35 million). This represented a good all round performance in strong markets. There was particularly good progress achieved in UK building construction and a first contribution from Charter in the US, offset by the impact of some issues related to the delivery programme under the London Underground PPP, which also had an effect in the engineering sector.
The sector order book increased by 50% to £3.6 billion. Major hospital schemes in Birmingham and Glasgow commenced, as did work on the Birmingham Schools contract. Haden Building Management secured over £750 million of facilities management work, including major long-term contracts for the Department for Work and Pensions and the Metropolitan Police Authority. The social housing market continued to grow strongly. The acquisition of Centex Construction, a leading US builder, was agreed in February 2007.
With order books continuing to grow, we expect very good progress in this sector in 2007, accelerated by the additional benefit of the acquisition of Centex.
Civil and Specialist Engineering and Services
Profit from operations before exceptional items and amortisation of intangible assets in the engineering sector increased by 12% to £55 million (2005: £49 million). This reflected a good all round UK performance, with strong growth from Balfour Beatty Utilities and Balfour Beatty Management. Outside the UK, there were improved performances from our businesses in Hong Kong and Dubai. In the US, although underlying performance improved, there were some further losses in the central division, which is in the process of closure.
The sector order book increased by 12% to £4.5 billion. This reflected a major long-term contract win in utilities contracting for Northern Gas Networks, four new contract awards in road management and maintenance, the award of the Northern Ticket Hall contract at King’s Cross St Pancras Underground Station, and the acquisition of Birse in July. Early in 2007, we signed the £550 million Eastern overhead line and cable alliance with National Grid.
Our engineering markets, particularly in the UK, Dubai and Singapore, remain strong and, with further recovery in the US, we expect to make substantial progress in this sector in 2007.
Rail Engineering and Services
Profit from operations before exceptional items in the rail sector rose by 19% to £38 million (2005: £32 million). This reflected an excellent recovery in the second half of the year, with good settlements on projects in the UK, Europe and Asia and steady progress on major works, including those for Metronet and BAA.
The sector order book declined by 17% to £1.0 billion during the year as a number of major projects were completed. The £363 million contract for the upgrade and extension of the East London Line was secured late in the year. Notable on-time, on-budget completions included the complex Waterloo and City Line project on the London Underground, the technical works in the Berlin Tunnel, the new 5 Malpensa to Turin line in Italy, and the multi-disciplinary Ingolstadt to Nuremberg project in Germany.
We do not expect an upturn in overall spending in our major markets in the short term. However, steady growth in the world rail infrastructure market is predicted for the longer term.
Investments and Developments
Profit from operations before exceptional items in the investments sector improved by 60% to £32 million (2005: £20 million). This reflected significantly better profits in Barking Power, good performance in mature concessions, a reclassification of Connect Roads from subsidiary to joint venture and an increased shareholding in Consort Edinburgh. Performance of the Metronet concessions was less satisfactory as a result of the complexity of the delivery issues, which are the subject of close attention.
During the year, two projects were converted from preferred bidder to contract. These were the £553 million Birmingham Hospital scheme and the £89 million Birmingham Schools scheme. Preferred bidder status was achieved for the Knowsley Building Schools for the Future scheme, the Derby street lighting scheme and, in January 2007, for the Fife Hospital scheme in Scotland.
Also in January, as a first step in its diversification into non PPP investments, Balfour Beatty Capital acquired Exeter International Airport for £60 million. During the year, Balfour Beatty Capital offices were established in the US, Germany and Singapore. Preliminary bids have been submitted in each of these markets.
Balfour Beatty Capital now has 27 concessions, including six at preferred bidder stage, involving £341 million of committed equity.
In 2007, profits will be impacted both by significantly increased bid costs and overheads as we grow the business overseas and the performance of Metronet where further action is being taken to secure the long-term success of the concessions.
We anticipate that the financial performance of our healthcare, education, road and general infrastructure concessions will continue to meet or exceed expectations and that our preferred bidder projects and a strong bid pipeline will see our portfolio continue to grow. We will also continue to increase our presence in overseas PPP markets.
EXCEPTIONAL ITEMS
There was a net exceptional charge of £25 million post tax. In the first half of the year, a £16 million goodwill write-down was taken on the carrying value of the central division of our US civil engineering business, which arose from the acquisition in 2001 of National Engineering and Contracting, with some consequent restructuring costs. There were also exceptional integration costs arising from the acquisition of the Birse Group in July.
As in previous years, there was a premium paid on the buy-back of preference shares, amounting to £7 million in 2006. These items were partly offset by a credit arising from a reduction in the fine levied in respect of the Hatfield rail accident in 2000.
STRATEGIC PROGRESS
The Group’s growth over the next two to three years is implicit in its existing business mix and is underpinned by the order books and market positions of its operating companies. In order to continue our long-term record of double-digit profit and earnings growth, we have identified four areas for expansion and investment.
UK Infrastructure
The majority of the businesses in which we make our best and most reliable margins are in UK infrastructure markets, many of which have strong positive growth momentum, including major public building, social housing, utilities contracting and regional civil engineering. Last year, we announced our intention to add to our presence in these markets.
In July, we completed the acquisition of Birse Group plc, a leading UK regional civil engineering business, for a cash consideration of £32 million. Birse has annual revenues of over £300 million and a strong presence in regional markets which is complementary to that of Balfour Beatty Civil Engineering. It also adds new disciplinary capabilities in the coastal and rail sectors and process expertise in water, power and the nuclear sector. Other opportunities are under review.
Professional and Technical Services
There is a clear trend amongst our key customers to demand a broader and more proactive role from us in addition to that represented by our long-established construction and maintenance services.
During 2006, we have made good progress in the further development of our professional and technical services capability through the growth of Balfour Beatty Management which was formed in 2003. This group, which now employs approximately 350 professionals, has played a key role in securing major long-term contracts for National Grid and United Utilities and, most recently, has led a major bid to become partner for complex building integration for BAA’s 10-year airport investment plan.
Balfour Beatty Management’s work on the King’s Cross St Pancras Underground Station development has reduced overall project costs by over £170 million. The business will continue to grow, including, possibly, through acquisition.
Private Finance
Our UK PPP business, Balfour Beatty Capital, has substantial skills and in-built growth momentum. The experience and expertise represented in its team of over 200 professional staff put the business in a strong position to expand. During 2006, in addition to continuing the development of its UK PPP business, the company has turned its attention to non-PPP asset investment in the UK and emerging PPP markets in the US, continental Europe and Singapore.
In January 2007, through our specialist subsidiary, Regional and City Airports, we acquired one of the UK’s fastest growing regional airports, Exeter International, for £60 million. We have significant expertise in the design and construction of airport assets and are currently developing a master plan for a phased development of the airport to match passenger demand growth.
Overseas, Balfour Beatty Capital has, during the year, established offices in the US, Germany and Singapore and preliminary bids have been submitted for projects in each of these territories. We have been shortlisted for the Oakland Airport Connector project in California.
Overseas Markets
In the longer term, maintaining our growth targets will require the development of broadly-based domestic businesses outside the UK.
Our key target markets are the United States, Western Europe and South-East Asia. In February 2007, we announced that we had reached agreement to acquire Centex Construction, a leading US building company, from Centex Corporation for a consideration of $362 million. It is anticipated that, upon completion, Centex Construction will have significant net cash in its balance sheet.
Centex Construction is a high-quality building company, with sales expected to exceed $2 billion in 2007. It gives Balfour Beatty critical mass in the US in a core Group business and brings substantial new business development opportunities, including in PPP. It is also expected to make a strong immediate contribution to growth and generate significant value for shareholders.
It operates through four divisions based in Florida, Texas, Washington DC and North Carolina and is among the market leaders in each of its territories of operation. It is also a leading player in the US military housing market and has announced that it has been awarded the $525 million Navy South-East contract in conjunction with its partner, GMH.
OTHER ACQUISITIONS
In March 2006, Balfour Beatty completed the acquisitions of Charter in the US and Edgar Allen in the UK. Charter, based in Texas, provides construction management, design and build and construction services to a range of customers, particularly in the education sector. The business, which was acquired for a cash consideration of £17 million, has annual sales of approximately £100 million and has become part of Heery International.
Edgar Allen is a UK manufacturer of switches, crossings and other rail track products, with annual sales of approximately £25 million. Its acquisition, for an initial consideration of £21 million, strengthens Balfour Beatty’s leading position in the UK and international track products markets.
THE BOARD
Two new non-executive Directors were appointed to the Board in July 2006, Mike Donovan, who was most recently Chief Operating Officer of Marconi plc, and Stephen Howard, who was most recently Group Chief Executive of Novar plc. Chalmers Carr retired as a non-executive Director in August 2006. Jim Cohen, an executive Director since 2000, retired from the Board on 18 February 2007.
SAFETY
The Group’s accident frequency rate reduced by a further 24% during 2006, continuing the positive trend of recent years. The safety of our people and those whom our business affects remains our highest priority. We have also made good progress in managing our environmental impacts, including our relative contribution to global warming and managing and recycling our waste.
OUTLOOK
We have record order books, a number of preferred bidder positions on major projects, and our markets are generally healthy and continue to offer substantial opportunity.
We have also made good progress in pursuing the strategic priorities which we set out last year and have substantially added to our earning power as a result, which will serve to underpin future growth.
We believe that we will be able to make further good progress in 2007.
Enquiries to:-
Ian Tyler, Chief Executive
Anthony Rabin, Finance Director
Tim Sharp, Head of Corporate Communications
Tel: 020 7216 6800 www.balfourbeatty.com
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