Galliford Try's Strong Financials and Growing Order Book Position It as a Small-Cap Investment Opportunity

Galliford Try, a UK construction company, is attracting attention from investors due to its robust financial health and expanding project pipeline. The firm, which employs approximately 4,000 people and operates in building and infrastructure sectors, is noted for generating cash, maintaining a strong balance sheet, and consistently upgrading profit forecasts.

Recent performance indicates that profits for the recently concluded year are expected to meet the upper end of analyst predictions, reaching around £53 million. This comes after a period where revenue grew by 3%, a notable achievement in a market where management had initially anticipated no growth.

Financial Strength and Growth Prospects

A key highlight for Galliford Try is its financial standing. The company reports net cash of approximately £259 million and has no outstanding borrowings, with its credit facility remaining unused. This substantial cash reserve is nearly half of the company's total market value. Following a recent trading update, Panmure Liberum, the company's broker, raised its price target for Galliford Try shares from 650 pence to 690 pence, with the shares trading at 580 pence. The firm also increased its earnings forecasts for the next two years by 10% to 11%.

Looking ahead, Galliford Try's management has set targets of at least £2.2 billion in revenue and a 4% divisional margin by 2030. Projections based on these targets suggest earnings per share could reach between 52p and 69p, a significant increase compared to the 17.7p achieved in 2023. This growth is underpinned by a rising order book, which has increased from £4.1 billion to £4.3 billion over the past year, covering about 90% of the revenue anticipated for the upcoming year.

Sector Opportunities

Growth is expected to stem from several key areas. The government's prison-building program, which plans for 14,000 new places by 2031 with an estimated cost of up to £10.1 billion, presents a significant opportunity. Additionally, increased defense spending and a planned upgrade of military accommodation are expected to drive further business. The water sector is also identified as a major potential growth area, with regulated spending in England and Wales projected to rise substantially in the current five-year investment cycle, increasing Galliford Try's addressable market significantly.

Shareholders are also being rewarded through dividends and share buybacks. The forecast dividend yield stands at 4.6%, expected to exceed 5% next year, and the company completed a £10 million share buyback in April.

Industry Challenges and Valuation

Despite these positive indicators, the construction sector inherently carries risks. Operating margins in the industry remain thin, typically around 2.5%, meaning that a single problematic contract can significantly impact profits. The broader UK construction market has faced challenges, with economic indicators showing periods of contraction. Slow government decision-making has also affected growth in the building division.

Investors are cautioned that Panmure Liberum serves as Galliford Try's corporate broker, and its positive outlook should be considered in light of this relationship. While Galliford Try's shares have seen a re-rating in recent years, trading at approximately 11 times next year's forecast earnings, they are no longer considered a deep bargain compared to peers like Kier or Costain. However, when the company's substantial cash reserves are excluded, the underlying business is valued at a considerably lower multiple. Analysts suggest that the market's current caution may be a lingering effect of past industry issues rather than a reflection of Galliford Try's current performance and prospects.