SMALL CAP IDEA: Galliford Try underappreciated

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Over the course of several years leading up to the pandemic, several companies in the non-residential construction industry delivered profit warnings with alarming reliability.

Whether Galliford Try Holdings was one of that number through bad luck, bad judgement, or a mix of the two, is a moot point now, as the business has a new management team and are almost two years into a turnaround designed to make the business much more predictable for investors.

What’s more, the stock market has not yet caught up, with analysts noting the market cap is almost parallel to the company’s net cash position and the valuation of its public private partnership assets, suggesting the construction and infrastructure business come for free, so to speak.

The timing is key too, with a supportive industry backdrop, with government and private sector investment pouring into the sectors where the company specialises: health care, education, highways and water.

Building troubles: Over the course of several years leading up to the pandemic, several companies in the non-residential construction industry delivered profit warnings with alarming reliability

Building troubles: Over the course of several years leading up to the pandemic, several companies in the non-residential construction industry delivered profit warnings with alarming reliability

The leadership team of chief executive Bill Hocking and finance director Andrew Duxbury took over in January 2020 after the sale of the group’s housebuilding arm.

As well as a new start, carving out the housing business gave them the sort of solid balance sheet that is now a requirement for almost all government and private sector contracts after the Carillion and Interserve disasters of not-that-distant memory.

Alongside the Uxbridge-headquartered company’s recent annual results, the pair delivered a new sustainable growth strategy.

The business has been remoulded with the values Hocking, a former executive vice president at multinational rival Skanska, and Duxbury, who joined first joined the company from PwC in 2016, view as essential to compete in the construction sector, including refinements to the operating structure, investment in the workforce and a focus on improving the company culture.

‘Building a really strong foundation with those elements was essential to give us the platform for sustainable growth,’ says Duxbury.

The strategy focuses on driving a ‘progressive culture, socially responsible delivery, and quality and innovation to deliver sustainable financial returns.’

By 2026, the target is to grow last year’s 2 per cent operating margins up to 3 per cent as sales step up from just over £1.1billion last year towards £1.6billion, allowing a sustainable dividend with cover in the range of 2.0-2.5 times earnings.

‘Of those targets, the operating margin growth is more important,’ Duxbury stresses. ‘And the reason is that it’s about taking on the right work.

‘Construction companies can easily grow their turnover by just signing up to all sorts of projects, and then they spend the next three, four, five years paying the price.’

What helps is that the construction market is supportive to these growth aspirations, he says, allowing Galliford a greater ability to pick and choose the right sort of contracts.

‘Most of the work that we tender for, the biggest criteria of winning the work is not price but quality criteria,’ says Duxbury.

‘And the reason this is also very important for us, is we want clients who we can develop a sensible long-term relationship with. It is about delivering best value for clients, not just chasing the lowest price.’

Increasingly, government procurement departments rely on something called the ‘construction playbook,’ which sets out criteria for procuring construction services, including requirements for sustainability credentials such as a published carbon reduction plan, best construction practices, balance sheet strength, investment in people and other ‘social value’ metrics.

‘The fact these kinds of measures are increasingly important in winning work is good, because those are all the things that are important to us as well.’

‘It shows investors that sustainability is interwoven throughout the way we operate and that it is not a separate part of our strategy.’

Broker Peel Hunt said Galliford’s medium-term targets suggest scope for ‘material upside risk to earnings and dividends over the next five years.’

Analysts noted that the balance sheet strength equates to average net cash of 145p per share and investments in the portfolio are worth 43p per share, or 188p compared to the last closing share price of 117.2p.

Its operational performance across ‘structurally attractive’ markets leave the shares ‘materially undervalued,’ Peel Hunt added, with a sum-of-the-parts model indicating a base case target price of 230p. 

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