Construction in the UK post-pandemic is a strong investment theme we are following at the moment. Galliford Try Holdings (LSE:GFRD) has been one of the best performing small cap stocks in the construction sector in the UK since July. Investors are obviously seeing this as a strong turnaround story.
Galliford Try Holdings recently released full year results with a profit before tax of £11.4m. This compares with a loss of £62.2m a year before. This is quite the turn around and also comes in north of analysts’ estimates, which were as low as £9m. The market had, however, been expecting Galliford Try to come up with some more positive revenue numbers, and the company did not disappoint.
The company blamed 2020 losses firmly on the pandemic, so it is no surprise seeing it returning to profitability. It is also pursuing what its CEO Bill Hocking calls a more conservative strategy. Galliford Try lost more than £100m building the Aberdeen Western Peripheral Route under a lump sum fixed price contract. Now it does almost 90% of its work through frameworks.
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Plenty of cash since Linden Homes sale
The company has been cash rich since its sale of Linden Homes to Bovis in January 2020. This has put it in a much better position from a cash perspective. It has also been taking on less work, which has raised its operating margin. It still has a decent amount of cash on the balance sheet and revenues forecasts look confident for 2021 and indeed next year.
Galliford Try has also been reporting strong demand for its buildings, highways and environment businesses but says it is going to be much more selective about projects and is placing more emphasis on risk management.
The share price is not far off its 52 week high, but given some of the substantial changes being made at the company, and also the wider emphasis on new infrastructure within the UK, we would see it pushing past this level in fairly short order. The PE ration has crept just past the 20 mark, so it beginning to move out of the range where we would deem it a cheap stock.
Galliford Try should do well if there are no further UK lockdowns
Three brokers currently cover Galliford Try – all still rate it as a strong buy.
There are always going to be risks with a company in the construction space which investors will need to consider. It looks like COVID hit Galliford Try harder than some construction firms, with widespread furloughs of its 3000 staff base and the suspension of its previously announced dividend.
Construction was one of the few sectors which came back online quickly during the pandemic. Investors should be aware of that vulnerability as far as Galliford Try is concerned, should we face another UK lockdown over the winter months. We are fairly confident that even should that happen, construction projects will remain largely untouched.