This report is an updated version of the report published on 6^th April 2022 at 7:51 AM GMT+1.

1. UK Engineering & Construction Industry Landscape

The Engineering & Construction sector in the United Kingdom offers employment opportunities to millions of people. It encompasses contracting (construction of a building, electrical, plumbing, etc.), services (architectural & quantity surveying, wholesale of products, leasing, etc.), and products division (building materials, metal structures, paints, etc.). The industry comprises of few large players, and most of the firms are small or medium-sized. Some of the major players include Balfour Beatty, Morgan Sindall, and Kier, to name a few.

The industry has been impacted by the onslaught of the Covid-19 pandemic, and output has taken a hit. Nevertheless, recent data from the Office for National Statistics reflect that monthly construction output has increased by 1.1% in volume terms during January 2022 and has been at its highest level since September 2019. The sector clocked its third consecutive monthly growth greater than 1.0% during the past few months. The uptick in January 2022 has been driven by an increase in repair and maintenance by 4.6%. Further, the level of construction output in January 2022 was reported at £197 million higher than February 2020 pre-COVID level. This reflects a gradual shift of the economy to a normal level of operations. Repair and maintenance work also reflected 9.3% above the February 2020 levels.

Key Trends in the Engineering & Construction Sector

Risk Exposures to the Engineering & Construction Sector

• Resource Risk: The sector comprises of complex projects which require the availability of skilled labor. However, there is a gap between the work and availability of skilled resources which might cause delays in the project schedule.
• Inflation Concerns: The prices of raw materials have shot up in the recent past due to the rise in inflation levels. This impacts the E&C sector directly on its margin performance.
• COVID-19 Impact: Impact of the COVID pandemic is still lingering which poses a risk of supply chain disruption to the sector.
• Geopolitical Tensions: The invasion of Russia by Ukraine has given rise to geopolitical stress and a sharp rise in energy prices can be witnessed.

SWOT Analysis

Engineering & Construction Sector Outlook

With reference to the recently available data from the IHS Markit/CIPS, the UK Construction PMI stood at 59.1 in February 2022, up from 56.3 in January 2022. The sector has continued to show signs of recovery after the recession phase due to the COVID pandemic. As per the data from the Business Insights and Conditions Survey (BICS), some of the challenges in sourcing construction products in the latter half of 2021 have continued to ease. This, coupled with the easing of supply chain constraints, gives decent expectations of new orders in the near term in the construction industry. Overall, all new order sectors had recovered to above their pre-pandemic levels, reflecting the demand for work across the industry.

2. Investment analysis and stocks under discussion (BDEV and BBY)

After gaining insights into the Engineering & Construction sector, we would look at the business model of two E&C players listed on the London Stock Exchange.

A. Barratt Developments PLC (LON: BDEV)

(Recommendation: Buy, Potential Upside: 15.66%, Market Capitalization: GBP 5.33 billion)

Barratt Developments PLC (LON: BDEV) is an FTSE 100 index listed prominent housebuilder in the United Kingdom. Its business model involves the acquisition of land, approval of permits and building quality homes.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering between the lower and middle Bollinger band with low 14-day RSI levels of ~39.81.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.66% over the closing price of GBX 519.60 (as of 05 April 2022).

B. Balfour Beatty PLC (LON: BBY)

(Recommendation: Buy, Potential Upside: 15.27%, Market Capitalization: GBP 1.61 billion)

Balfour Beatty PLC (LON: BBY) is an FTSE 250 index listed leading international infrastructure Group that finances, develops, and builds key infrastructures.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                 

From a technical standpoint, the stock is hovering between the lower and middle Bollinger band, with the possibility of a breakout in the near term.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.27% over the closing price of GBX 252.20 (as of 05 April 2022).

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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