PLC in Construction

Introduction

The aim of this report is to provide an overview of a PLC (Public Limited Company) in construction industry noting strengths and main areas of activity. A discussion of market for construction by analysis of annual reports, whilst looking at economic forecasts, output articles alongside government statistics. Company and market data are further analysed to identify particular sectors in which the company currently operates; recommendations are made to which areas should be pursued with a strategic approach that can be adopted to achieve this. Some or all of the following factors will be part of the report:-

1. Percentage changes in both turnover and trading profit year on year
2. Percentage breakdown in trading profit or turnover by sector eg housing, commercial, civil etc or by geographical sector
3. Percentage change in earnings per share
4. Share price Relative to the market or comparable construction companies
5. Strengths and Weaknesses of the company.

Adopted research method was hourglass model where the broad spectrum of construction industry and the current market was analysed. The data collection was done from various sources mainly web browsing - reading construction based articles, company profiles, financial reports, economic forecasts, government statistics and news broadcasting websites. Finally trends were closely examined for the Credit Crunch and the collapse of property and private housing markets.

Corporate History

The company under consideration in this report is Balfour Beatty, who is a multinational infrastructure group mainly operating in professional services, construction services, support services and infrastructure investments. It was formed in 1909 by George Balfour (mechanical and electrical engineer) and Andrew Beatty. The company initially focused on tramways - first contract being for the Fife Tramway Light and Power Company hydro-electric power, dams, transmission lines and power stations. Other works in 1918 included standardisation of the electricity supply in Derbyshire and Nottinghamshire, and construction of tunnels and escalators for London Underground. By 1924 Balfour Beatty started overseas work on large scale such as the management of East African Power & Lighting company; construction of hydro-electric schemes in Dolomites, Malaya and India; power stations in Uruguay and Argentina and the Kut Barrage in Iraq.

During WWII Balfour Beatty worked on war projects such as Scapa Flow (blockage barriers were constructed to stop foreign invasion) and Mulberry Harbour (portable temporary harbour developed to facilitate the rapid offloading of cargo). Balfour Beatty bought a Canadian company in 1953 who worked on harbour and dam projects. Later it was bought over by Power Securities which was taken over by British Insulated Callender's Cables in 1969. Then in 2000, BICC sold its cable operations and renamed itself Balfour Beatty. It moved from its traditional area of expertise in 1986 when it formed Balfour Beatty Homes, building on a modest scale from its office in Nottingham and other locations across UK. Balfour Beatty has created a trend over the years since the company was formed (work in different operations), this is now being followed further where mostly Balfour Beatty have been working in construction and consultancy firms; which can be seen when Balfour Beatty bought Subsurface Group (US consulting and engineering firm) in January 2013.

Strengths and Weakness

The strengths of Balfour Beatty lies in integration and manage local supply chains to deliver projects on budget and on time. Previously the company's focus has been to deliver speed, quality and low cost, today its moved to provide clients value for money whilst keeping up with the low carbon standards. Balfour Beatty has been mainly working in the construction services sector out of four market sectors mentioned below. The company's weakness are set in the other sectors i.e. investment and services where the focus is running low comparatively. The revenue of the operating sectors alongside the directors' report back up this statement, where the construction services sector has received awards in UK and it is spreading rapidly overseas.

Main activities by turnover, profit, area

Balfour Beatty operates in over 80 countries, in diverse markets and economies. The engineering and construction group completes work for the international rail, road, utility systems and buildings markets. It is the second biggest construction company in the UK and the fifteenth biggest in the world. The main areas of activity for the company are Professional Services and Construction Services sector as shown below. Figure 1 Revenue (including joint ventures and associates)

2010

During this year, series of initiatives for the next 4 - 5 years were announced to take full advantage of the expected long-term growth in infrastructure markets. Firstly, the company will invest to grow capabilities both organically and by acquisition, particularly in professional and support services and in markets where they see the greatest opportunities. Secondly, the company will seek greater income from Infrastructure Investments. To achieve this Balfour Beatty will make regular stream of mature asset disposals worth A£200m-A£300m, gaining around A£20m in disposal gains per annum. Finally, they have plans to increase group operating margin to 3.5%-4.0% level over this period by improving business mix, utilising their resources more effectively and generating A£30m annual gross savings from procurement and back office initiatives in the UK, A£20m of which is expected to go through to the bottom line.

Financial Summary

Revenue including joint ventures and associates improved by 2% to A£10,541m. This was due to acquisitions, including the consolidation of Parsons Brinckerhoff for the full year for the first time, which accounted for 13% growth. The underlying reduction of 11% in revenue was caused largely by weakness in construction markets both in the UK and the US. Pre-tax profit was up by 20% to A£319m, lifting Group operating margin to 3.2%, partly due to our evolving mix of business after the consolidation of Parsons Brinckerhoff, but also due to excellent operational performance in Professional Services and Construction Services. Adjusted earnings per share rose slightly to 34.7p (2009: 34.4p). The increase in the profit before tax was largely offset by the increase in the average number of shares in issue due to the full year effect of the 2009 rights issue to fund the acquisition of Parsons Brinckerhoff. The Board has recommended a final dividend of 7.65p per share in respect of 2010, giving a full-year dividend of 12.7p (2009: 12.0p adjusted), up 6% on 2009. (https://www.balfourbeatty.com/managed_content/news/2011-03-03.pdf)

2011

Strong performance was delivered in 2011, further progress was made towards the delivery of strategy and demonstrated diversity, flexibility and resilience of their business. The company sees opportunities in growth sectors such as rail, power and growth markets like Australia, Canada and India. The company aims to achieve cost efficiency whilst recycling capital investments made in businesses which were successful in 2011 with confidence that these programmes will underpin performance.

Financial Summary

• Order book stable at A£15.2bn
• Revenue up 5%; up 6% on a constant currency basis and 4% on an organic basis
• Underlying profit from operations improved in all divisions except for Construction Services
• Existing cost efficiency programme delivering, with A£15m of savings in 2011; a further A£50m pa of savings targeted through a broader programme over the next three years. A£20m gain from infrastructure investment disposals; Directors’ valuation of the PPP portfolio increased to A£743m
• Earnings per share up 9%; dividend increased by 9% to 13.8p
• Net cash position strong at A£340m

(https://www.balfourbeatty.com/files/results/2012/fullyear/fullyear_2011_announcement.pdf)

2012

Balfour Beatty reported a 7% fall in profits as new growth markets failed to offset a continued weakness in its core construction business in Britain and United States. The group made an underlying pre-taxprofitof 310 million pounds in 2012, ahead of analysts' forecasts which ranged between 204 million and 323 million pounds and averaged 295 million pounds. Balfour Beatty's Professional -- project management, design and planning -- and Support Services divisions combined jumped from making up 44 percent of its order book in 2011 to 47 percent in 2012, though some analysts worry its progress has been slow. The order book for Support Services was up 12 percent at 5.7 billion after a 3 percent rise in revenue to 1.6 billion pounds.Professional Services'revenue was up 1 percent at 1.67 billion pounds and the order book was up 9 percent at 1.6 billion. Balfour Beatty said that 2012 was a mixed year in Australia, a market it has earmarked for growth, with revenue decline in transport offset only partly by growth in mining. The group said it still believes that construction markets in 2013 will be challenging and that it is on track to deliver combined annual cost savings of A£80 million in 2015.

Financial Summary

• Continued to grow in target geographies and sectors while facing challenges in UK and US construction markets
• Order book up 1% at A£15.3bn with 63% now economic infrastructure
• Revenue down 1%; down 4% before the impact of foreign exchange and acquisitions
• Continuing profit growth in Professional Services and Investments
• Cost efficiency programme on track to achieve A£80 million by 2015; A£36 million of savings achieved at a non-underlying cost of A£61 million in 2012
• Directors’ valuation of the PPP portfolio at A£734 million (2011: A£743 million) after the disposal of two assets generating disposal gains of A£52 million
• Strategic decision taken to divest of Mainland European rail operations; non-underlying cost of A£104 million incurred including A£95m goodwill write down
• Underlying earnings per share down 1%; full-year dividend increased by 2% to 14.1p

(https://www.balfourbeatty.com/files/results/2013/fullyear_2012_announcement.pdf)

Company accounts

Turnover and Trading Profit of past three years is shown below. There is an increase of turnover of A£494 million between year 2010 to 2011, which then drops in year 2012 by A£139 million. However the Trading profit is been in decline for past three years starting from A£7 million in 2010 and A£22 million in 2012.

Year	Turnover (A£ m)	Trading Profit (A£ m)
2010	10541	338
2011	11035	331
2012	10896	309

Figure 2 Year on Year turnover and trading profit

Turnover by Activity

From table below the Construction Services is main area of activity for Balfour Beatty with having generating most of the revenue. There is a general increase of revenue for Professional and Support Services from year 2010 - 2012. However it is noted that the Construction Services and Infrastructure Investment markets have been at peak in year 2011 and dropped in 2012.

• Professional Services has an increase of 32 million from year 2010 to 2011, and an increase of 23 million between year 2011 to 2012

• Construction Services has an increase of 307 million from year 2010 to 2011, then went in decline for the following year due to fall in general construction division - with a decrease of 91 million between year 2011 to 2012

• Support Services has an increase of 150 million from year 2010 to 2011, and an increase of 49 million between year 2011 to 2012

• Infrastructure Investment has an increase of 6 million from year 2010 to 2011, then went in decline for the following year due other companies endeavouring towards enhancing operational efficiency and hence increasing competition in energy and renewables - with a decrease of 120 million between year 2011 to 2012

Year	Professional Services (A£ m)	Construction Services (A£ m)	Support Services (A£ m)	Infrastructure Investments (A£ m)
2010	1613	6743	1434	750
2011	1645	7050	1584	756
2012	1668	6959	1633	636

Figure 3 Year on Year turnover by sector

Earnings per Share

Figure 4 Percentage change in Basic earnings per share

Year	Earnings per share (p)	Change (%)
2010	23.0	16
2011	26.7
2012	6.5	75

 

Figure 5 Percentage change in Underlying earnings per share

particular sectors of the market in which the company currently operates

Further in-depth to where the company focuses on can be seen from the following valuation portfolios by sector. The company's main focus is roads, then hospitals, then schools and others:- Figure 6 Portfolio Valuation: December 2010 Figure 7 Portfolio Valuation: December 2011 Figure 8 Portfolio Valuation: December 2012

UK construction market and overseas

The construction division finished the year with an order book of 8 billion pounds, down 6 percent on a year ago, including a 17 percent fall in the United States, while revenue in the division was down 1 percent at 6.96 billion pounds. Total revenue was also down 1 percent at 10.9 billion pounds. Construction groups in UK have become volatile through the industry downturn that hit in 2008. Balfour Beatty have embarked on ambitious cost cutting drives and diversifying into adding new services as well as new markets likeBrazil, India and Australia. The market has fluctuated unusually in terms of how the sectors are operating over the past few years for Balfour Beatty, it can be noted that there was a decline in construction division in UK in year 2012 (drop of 381 million from 2011-2012) where as the American market was nourishing (rise of 130 million from 2011-2012) as seen below.

Year	United Kingdom (A£ m)	Europe (A£ m)	Rest of the World (A£ m)	United States of America (A£ m)
2010	4991	-	1173	3072
2011	5700	-	1922	3413
2012	5319	485	1549	3543

Figure 9Year on Year turnover Geographically

Recommendations of areas of operation that should be pursued and others which might be reduced

The table comprises the current market where Balfour Beatty is active.

• Professional Services (PS) 35 - subsidiaries
• Construction Services (CS) 99 - subsidiaries
• Support Services (SS) 5 - subsidiaries
• Infrastructure Investment (II) 15 - subsidiaries

Figure 10 Areas Balfour Beatty is active at present From the table above it can be seen that Balfour Beatty is currently working in 16 different markets ranging from education to renewables. The company has been successfully operating on a large scale in markets such as Roads and Rail, this falls under Construction and Professional Services sector both in UK and in Overseas. The company has helped other communities including Britain to build their basic necessities i.e. transportation sector so far, but not to forget that these were the foundations set by George Balfour and Andrew Beatty initially. In order for the company to progress further and be in lead of the current competitive circumstances the company should start investing in the Infrastructure Investments and Support Services whilst withdrawing from Professional and Construction Services. The major difficulty faced today by most of the developing countries is the production of energy and reduction of carbon usage during energy production. Balfour Beatty has made significant progress in and has injected funds in these markets but for Balfour Beatty to stay a step ahead of other companies they should pursue their following efforts in energy sectors mainly renewables. This can be achieved by reducing the funds used for other sectors such as Construction Services - Balfour Beatty has alone won three awards with 9 of their subsidiaries working in UK. Possible Strategy - Grow in new geographies and market sectors - Deliver greater value to clients - Improve operational performance and cost-effectiveness - Continue to show leadership in values and behaviour

Conclusions

The conclusion that can be drawn from this report is the following: No doubt Balfour Beatty is a successful construction company in UK, which started working overseas within 15 years of its establishment in 1909. It is operating in over 80 countries, in diverse and challenging markets where economies are as diverse as the country themselves. Over the years Balfour Beatty moved from its traditional area of expertise during times of depression and helped build protection for home country. Later, it went back to power transmission and tramway market (traditional area of expertise). However Balfour Beatty moved to other sectors in a bid to thrive and succeed in the market; it emerged on an enormous scale in construction industry and made the most of it, whilst surviving in Credit Crunch when construction sector was in downfall. These declines can be noted by the analysis of turnover and trading profits. Most importantly during the financial depression where there was a decline in construction industry, Support Services market was in demand from where Balfour Beatty has shown progress. Lastly; the criticism on usage of fossil fuels have increased and the resources are becoming scarce making energy the biggest problem of this era for both developed and developing countries, Balfour Beatty has their potential in advancement of this market where they can secure their coming prosperity with assurance.

References

1. https://www.balfourbeatty.com/
2. https://data.gov.uk/dataset/annual_abstract_of_statistics
3. https://uk.reuters.com/article/2013/03/07/uk-balfourbeatty-results-idUKBRE92609F20130307
4. https://www.ft.com/cms/s/0/e20aaaa6-a50a-11e3-8988-00144feab7de.html#axzz2vBiH0mO4
5. https://www.balfourbeatty.com/index.asp?pageid=68
6. https://www.balfourbeatty.com/managed_content/news/2011-03-03.pdf
7. https://www.balfourbeatty.com/files/results/2013/fullyear_2012_announcement.pdf
8. https://www.balfourbeatty.com/files/results/2012/fullyear/fullyear_2011_announcement.pdf
9. https://www.bbc.co.uk/search/?q=Balfour+Beatty&search_form=in-page-search-form
10. https://www.bing.com/news/search?q=balfour+beatty&qpvt=balfour+beatty&FORM=EWRE
11. https://www.youtube.com/watch?v=wi0WtmQxqbA
12. https://www.balfourbeatty.com/files/reports/2010/ar2010.pdf
13. https://www.balfourbeatty.com/files/reports/2011/ar2011.pdf
14. https://www.balfourbeatty.com/files/reports/2012/ar2012.pdf

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