Shares in support services and construction company, Balfour Beatty (LSE: BBY), are up by 3.5% today despite the release of a challenging set of results for the first half of the year. Pre-tax losses widened on a reported basis from £58m in the first half of 2014 to £150m in the first half of the current year.
This, though, is not a major surprise, since Balfour Beatty is still feeling the effects of unprofitable legacy contracts and, while it means that the company’s interim dividend will be cancelled, such contracts should be completed by the end of 2016.
Positive outlook
Clearly, the performance of Balfour Beatty is disappointing, but the company’s medium to long term outlook is rather positive. For example, it’s forecast to post a profit on an adjusted basis in the current year, with earnings per share set to treble in 2016. This puts the company’s shares on a price to earnings growth (PEG) ratio of just 0.1, which indicates that they could continue the run that has seen them rise by 22% since the turn of the year.
Of course, the improving outlook for the UK economy is great news for Balfour Beatty. While interest rate rises may be just around the corner, the Bank of England has been at pains to point out that it is more dovish than hawkish and that rate rises will be slow and steady over the next handful of years. This should allow the current prosperity that is sweeping across the UK to continue, and cause demand for construction services to rise further.
Huge appeal
This, then, is great news for the wider support services sector and, as a result, the likes of Kier (LSE: KIE) and Carillion (LSE: CLLN) hold huge appeal.
Looking ahead, Kier’s bottom line is forecast to rise by 19% in the current year and by a further 12% next year. This puts the company on a PEG ratio of 1 and, with a dividend yield of 4.4%, it remains a very lucrative income stock, too. That view is further enhanced by a payout ratio of just 62%, which indicates that dividends could move higher at a faster rate than profits over the medium term.
Meanwhile, Carillion remains a hugely undervalued stock. It has a price to earnings (P/E) ratio of just 10.5, which indicates that an upward rerating could be on the cards. And, while growth in earnings of just 4% is expected next year, the improving UK economy could mean that Carillion’s profitability surprises on the upside. Furthermore, its yield of 5.2% remains one of the most appealing in the FTSE 350 due to it being covered 1.8 times by profit and also because dividends per share have risen in each of the last five years.
So, while Balfour Beatty’s results may be somewhat disappointing at first glance, it offers huge future potential alongside Kier and Carillion.