Contractor results: A turn up for the books

”Crisis what crisis?” was arguably the dominant theme to emerge from the latest company reporting round - at least from the leading construction groups. Sales failed to plummet, margins beat forecasts, order books scarcely budged and there has not been the haemorrhaging of cash that many had feared. It’s as if nobody had ever mentioned the word “austerity”.

Trying to persuade the average fund manager to invest in a contractor over the last couple of years has been like pulling teeth. Your own, that is. The one and only question that was asked by clients was “how much exposure does Buggins Builders plc have to the public sector?” If it was above half, nobody wanted to know. If it was below half … nobody believed you. As a result, valuation multiples languished.

The uniting themes for all three companies are: a. they’re big and b. they’ve got strong balance sheets with plentiful cash. For smaller companies, however, the outlook is bleaker

This negativity was in no small part due to dire predictions a couple of years ago from Galliford Try. The hybrid contractor-housebuilder advised analysts to brace themselves for the worst: construction sales were likely to fall by a third over the next few years; margins were going to halve; and the division’s positive cashflow was going to go sharply into reverse. It all brought to mind the words of Dad’s Army’s Private Fraser “we’re all doomed”. This un-nerved investors and shares went into a tail spin.

But results from Balfour Beatty, Carillion, Keir and, not least, Galliford Try over the past few weeks have painted a healthier picture. Revenues and/or order books were robust, construction margins went up in all cases and “challenging” was used only sparingly in outlook statements.

Galliford’s order book at the December half year stage was virtually unchanged at £1.7bn. Far from slipping in the direction of 1-1.5% as had been suggested two years ago, the margin edged up, from 2.4% to 2.5%. Revenues slipped 4%, possibly due to snow towards the end of the reporting period.

The order book had not been impacted by public sector cuts, the group conceded, 60% was now in long-term frameworks and there were signs of private commercial work coming back from the grave.

A similar picture emerged from Balfour Beatty. The UK construction order book had shrunk by a mere 3% (overall for the division it was up 12%). “We were surprised. It must have been because we won greater market share,” said chief executive Ian Tyler. Moreover, Mansell, the unit that is most exposed to public sector work, was thriving.
Kier’s construction revenues were up by 7% and margins edged up from 2.5% to a record 2.7%. Like the other companies, the mix of work has changed - and rapidly. In June 41% of incoming orders were in education. In the wake of school building cuts, this has fallen to 34%. But commercial has gone up from 4% to 12% of the total and transport from 3% to 22%. A building is a building, whether for public or private sector.

Even Carillion, the support services group that seems desperate to shed its building image, can’t seem to slim down its construction revenue

The uniting themes for all three companies are: a. they’re big and b. they’ve got strong balance sheets with plentiful cash. For smaller companies, however, the outlook is markedly bleaker, with hardly a week passing without regional contractors going bust. This is un-nerving even the most parsimonious of customers. The demise of two bigger fish, Rok and Connaught, forced clients to look more closely at the financial health of their contractors, Galliford’s chief executive Greg Fitzgerald suggested. Kier revealed that two big private sector clients that had dropped them in favour of cheaper bidders ended up re-opening discussions with the group.

At the other end of the scale, subcontractors are desperate for cash. If you’ve got a good reputation for paying on time, as Kier insists it always has, subcontractors will sharpen their pencils and submit keener prices.

Even Carillion, the support services group that seems desperate to shed its building image, can’t seem to slim down its construction revenue. Last year it vowed to reduce it from £1.8bn in 2009 to £1.2bn by 2013. In the event it only shrank by 6% in 2010 (with a healthy rise in margins from 1.4% to 1.9%). There will be a delay as longer contracts are unwound, the group responded. But the construction order book reduced by 20%, rather than 33% as targeted.

Could it be that those pesky customers just keep giving them work at decent margins? One still observes lots of Carillion hard hats and un-support-servicey “builders’ cleavage” on sites up and down the land. You can’t keep a good construction company down, it seems.

Alastair Stewart is a construction analyst at UniCredit Research