Whats the story?
Balfour has produced a string of profit warnings recently and has been without a permanent chief executive since May.
Thats now changed, as Balfour announced this morning that Leo Quinn, who is currently chief executive of defence firm QinetiQ,will be starting work as Balfours new chief executive on 1 January 2015.
Is Balfour now a buy?
Mr Quinn faces a tough challenge turning around Balfours core UK construction business, which is currently riddled with loss-making contracts.
Even in the good times, Balfour has always been a low margin business, with operating margins of around 2.5%. While the sale of Balfours Parsons Brinckerhoff business will bring in some much-needed cash, it will also highlight the firms low profitability.
In my view, the majority of Balfours value lies in its public-private partnership property portfolio, which is worth around 150p per share. At present, paying more than this seems unjustified, in my view.
Connect Groups main business is newspaper and magazine distribution. The firm also distributes books and educational supplies. As youd expect, its a high turnover, low margin business, but the firms valuation has reflected this until this morning, Connect traded on a forecast P/E of just 7.
Todays full-year results beat expectations, with underlying earnings of 21.7p per share versus consensus expectations of just 20.4p. The firms shares have gained 17% to 161p this morning, although remarkably all this has done is to maintain the companys low valuation, as it equates to an adjusted trailing P/E of 7.5.
Connects big attraction is its yieldthe firms full-year dividend of 9.7p equates to a yield of 6% at todays share price, making it a potentially attractive choice for income seekers.
However, Connects balance sheet isnt that strong, in my view. Its current assets do not cover its current liabilities (a standard test of balance sheet strength) and it hasa significant level of debt, plus a moderate pensions deficit.
Overall, I think Connects valuation is fair, but Id like to see a stronger balance sheet before considering a buy.
A better choice?
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.