THE expectation of a cut in UK public spending weighed heavily on Balfour Beatty’s shares in 2009, with the stock underperforming the overall UK market by 32%.
They have only very modestly outperformed so far this year and, while we do not expect the uncertainty to be lifted yet in the short term, we think it is already reflected in consensus estimates.
At the same time, we believe markets are not giving full credit to Balfour Beatty’s evolving business profile, both in terms of activities and geography.
The group is indeed moving from a UK capital investment-focused firm to a truly international and more service-driven group, which should mean earnings come in more steadily throughout the year and cut exposure to the harsher UK environment.
With a solid order book across a range of sectors and a net cash position, we believe Balfour Beatty offers solid growth prospects and relatively secure yields.
We expect some volatility around the UK election and as the macro environment remains uncertain, but the shares are trading at a discount both to peers and their own historical average multiple. Our fair value of 345p offers 30% total potential upside. We initiate coverage on Balfour Beatty with a buy recommendation.
Royal Bank of Scotland
RBS continues to face a number of challenges and risks, both company specific and industry related. However, we feel that many of these challenges are now better known and, as a result, more quantifiable.
Further, the near-term credit trends, if sustainable, will lead to a more rapid return to profitability than we had previously factored in.
While this improvement has clearly not gone unnoticed by investors, given the very strong recovery in the share price over the last 15 months, we still believe that there is more to go for.
The limited funding risk and a credible strategy of balance sheet reduction are the two key reasons behind our more positive investment rationale. We raise our estimate of fair value to 70p, which leads us to upgrade our recommendation to buy.
We are retaining our outperform recommendation on Man Group. The shares have been volatile of late, reflecting the performance at AHL, but we continue to feel the valuation is pricing in too bearish a scenario.
Following meetings with management, and with senior members of the AHL team, we do not believe that the fund is broken. We think that the group has a sustainable competitive advantage in managed futures through its scale, trading platform and research team.
In addition to its intellectual capital, the group has a trusted brand and long investment track record. The group also has a strong global distribution network to leverage these attractions. We think the dividend is secure, and that the valuation will drive outperformance in the in the medium term. We have left our 360p fair value unchanged.
Andrew Miller is head of the Newcastle office of Barclays Wealth