In my last article on Balfour, I mentioned management is more successful in selling off its assets “piece by piece” than operating the company.
Well, on Monday, of this week, John Laing Infrastructure (JLIF) has joined in to buy the ‘good part of Balfour’s business’.
It offered nearly a £1bn to buy-out Balfour’s PPP portfolio (also known as the ‘Infrastructure investments’ division).
Here is why they shouldn’t sell
A quick glance on the offer will have investors ‘rubbing its hands together’, thinking more share buyback or a ‘special dividend’ is coming its way.
Because (JLIF) is purchasing a division that represents only 6% of Balfour’s total revenue for a £1bn (almost equal to Balfour’s market capitalisation).
However, in terms of pre-tax profits and net assets, the PPP portfolio contributes more than 50% and 75% to the group.
So, JLIF is buying Balfour’s ‘cash cow’ division.
A quick glance of PPP portfolio and JLIF’s financial performance
Balfour’s management has valued its PPP portfolio division at roughly £1.05bn in June 2014.
In its 2013 annual report, the division reported revenue of £608m and net profit of £95m (a 15% net margin).
JLIF, on the other hand, reported net profits of £30m from its £800m investment portfolio, making a return of 4%.
Balfour’s PPP portfolio in 2013 was £766m, earning the group a 13% return.
2014
In its 2014 interim results, the division made a £69m in net profit from £271m in revenue a 25.5% margin (beating a 20% margin in the same period last year).
Using what I know so far, I project a 20% margin for the rest of 2014, with a net profit at £110m with revenue of £550m.
JLIF, in 2014’s interim results, its portfolio’s value at £821m and net profit of £26m (H1 2013: £21m).
WHAT SHOULD A FAIR OFFER BE?
My projected £110m of net profit 2014 from the portfolio valued at £1.05bn is a 10.3% return.
JLIF’s 2013 portfolio return was only 4%, though it could be higher in 2014.
The offer of a £1bn would net JLIF, an 11% return.
In my humble opinion (IMHO), Balfour’s management should only accept an offer that will…
