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(Sharecast News) - Jefferies initiated coverage of Balfour Beatty on Monday with a 'buy' rating and 375p price target, arguing that the market is underappreciating improved security of earnings and the infrastructure group's transformation towards a lower risk model.
The bank said Balfour looks set to deliver another year of earnings growth in 2022, the sixth in seven since new management took over.
"This continues a trend of improving operational momentum since earnings troughed in 2015," it said.
It noted that since arriving, management has delivered on objectives of cash generation and pre-tax profit, which make up 75% of annual incentives, underlining Jefferies' confidence in continuing strong execution.
The bank said Balfour is supported by structural growth tailwinds. "Rising demand for renewable energy, transportation links (road and rail) and housing supply is creating long-term structural growth tailwinds for Balfour's £7bn revenue business," it said.
"Alongside this, Balfour manages a £1.1bn investment portfolio which balances the shorter cycle construction with long duration, inflation linked concessions."
Jefferies is forecasting 5% earnings growth over 2022-25, putting it 8% to 10% ahead of consensus. In its forecasts, it assumes the support services business grows at around 8% compound annual growth rate from £80mn to £100mn by 2025, driven by a combination of strong sales demand and modest margin expansion.
"This adds circa 200 basis points to our group profit growth forecasts," it said.
