After two years of wading through mud and leeches, there are finally some signs that solid ground is in sight.avid Rogers assesses the evidence
The news that broke on Monday 5 July was typical of what’s happening in the industry right now. The government announced that it was lopping 700 schools off the Building Schools for the Future programme. The Homes and Communities Agency’s budget was cut as well - though not as badly as initially feared. And Experian said in July that activity would contract over the next three months, albeit at a slower rate.
Gloomy stuff indeed, but there were shafts of light elsewhere. The Office for National Statistics revealed on Friday that construction output had jumped 6.6% from Q1 to Q2, the biggest rise since 1963. Although this was in part due to firms catching up on projects affected by the winter’s bad weather, it’s a positive sign.
And while last week the Ministry of Justice withdrew its application for a 1,500-capacity prison in Essex, Skanska was closing in on a £100m prison deal, order books at Morgan Sindall and electrical contractor T Clarke were up, construction activity was on the rise for the fourth month in a row, ISG was trading strongly and results at Travis Perkins, the builders’ merchant and a bellwether firm, were above expectations.
The week before, Taylor Wimpey said the average selling price of its houses had risen £14,000 in the first half of 2010, a jump of 9% compared to the same period in 2009.
The messages are certainly mixed, but despite the BSF blow - and a big blow it was - something resembling confidence is returning to parts of the industry. It’s still early days, of course, but for the first time in a long time the mood is not quite so bleak.
This is the backdrop to Building’s annual ranking of the top 150 contractors and housebuilders this year.
“A lot has happened this year,” says Andrew Wyllie, Costain’s chief executive.
“The general consensus is that the economy has turned a corner after a pretty challenging couple of years. There is more optimism than pessimism. As an industry, we went a long way down.”
Tony Williams, who runs specialist advice firm Building Value, is also feeling a bit more chipper. “The gloomiest period was last spring when world stock markets were on their knees. It was terrible.”
Now the UK has crawled out of recession, Williams says the industry can look forward with some genuine hope. “The building industry is naturally optimistic,” he says. “But modest economic growth is forecast this year and next. I’ll take that. It’s a hell of a lot better than this time last year. I’m not saying we’re out of the woods yet, but we’re further out than a year ago.”
Last year’s turnover figures have held up well for the top 20 firms. The biggest, Balfour Beatty, now has nearly £1bn more in revenues than it did in 2008, while the company in 20th place, ISG, has a turnover of £1.05bn compared with the £1.09bn recorded by Enterprise in the same spot a year before. In a billion-turnover business, in a recession, being off by £40,000 is by no means a slump.
But before we get carried away, let’s remember that according to the Construction Products Association, output fell by 12% last year, the sharpest drop since 1974, and there is plenty of evidence of the effect it has had on much of the industry. So any returning confidence must be labelled “fragile”.
“Last year was catastrophic in the sense of declining volume,” says Williams. “A few things, like BSF, were ticking along but otherwise it was a desperate year. This year’s figures should be worse because there is always a lag. But even though activity will go down again, it won’t feel as bad because there is a less of an edge-of-a-cliff feel.”
Housebuilders are the most noticeable sufferers. In 2008, the highest ranked was Barratt with turnover of £3.6bn; a year later the figure was £2.3bn.
Housebuilders have also been affected by the fact that many contractors have tried to anticipate the threat of falling turnover by bidding for smaller contracts, particularly in the housing sector. One main side effect of the recession is that bigger and bigger firms are chasing smaller and smaller contracts: one small firm told Building it was amazed to find that one of its recent rivals for a £1m house in west London was a contractor whose turnover last year was far above £1bn.
This trend, says Kevin Cammack, an analyst with Cenkos Securities, has benefits for both contractors and clients. “The big boys are looking at £4m or £5m contracts to generate turnover,” he says. “They are more attractive to clients because they believe they are safer dealing with a Balfour Beatty than a local builder. One underlying issue for clients is the financial strength of the builder and ability to attract the supply chain.”
Cammack believes tender opportunities and orders will pick up next year but won’t turn into contracts until 2012. In the meantime there are signs, he says, that private sector work and big commercial projects in London are starting to come back - the sort of stuff that could plug the hole left by BSF. “There are elements of infrastructure that are still good and there is waste water, water and energy,” he adds. “Work driven by regulation is difficult to end.”
Consolidation in the marketplace is probably inevitable as firms are bought out of receivership or taken over by rivals that have been less affected by the recession. Costain’s Wyllie says: “As projects become increasingly large you need horsepower to deliver them, both human and financial.”
Others predict a more radical shake-up. Alastair Stewart, an analyst with Investec Securities, says the recession will affect those firms that don’t really have much to distinguish them from the competition, apart from the fact that they’ve always existed. “Undoubtedly there will be more consolidation,” he says. “Smaller guys will fizzle out and the guys who will stay will be the specialists, those with the technical ability. There are a number out there like this who are really good at what they do.”
Cammack says savvy contractors have made the failings of others work for them. “One of the best ways to give yourself a growth boost is to inherit contracts from failed firms. Clients are usually desperate to get someone to finish the job off and firms can renegotiate the profit margin.”
McLaren Construction, a business that has thrived in the recession, is a good example.
It picked up the £68m City of Westminster college project from failed Hertfordshire contractor William Verry last year, and Kevin Taylor, its chairman, said in February that he had an £18m war chest to buy businesses that were struggling in the recession.
Philip Pringle, McLaren’s group managing director, says 2010 turnover will be up 11% to £145m and the aim is to hit £180m next year. This will be helped, he says, by a gradual easing in the downturn. “I think there’s more improvement this year. I’d give it five out of 10 last year, now it’s more like 6.5.”
There will be more cuts in this autumn’s Comprehensive Spending Review but Noble Francis, economics director at the Construction Products Association, predicts that activity will rise 1% next year and in 2012. He admits, though, that this could be revised “if the government puts in sharper cuts than anticipated”.
Still, perhaps UK construction is finding its true level. Peak activity in the boom hit £111bn in 2007 and this year it is forecast to be £95bn. “We’ve had a very good run for the past seven years,” says Williams. “Maybe around £100bn is a more normal figure.”
How five firms are staying afloat
The realist: Keltbray
£5.77m Pre-tax profit
This demolition firm is one of London and the South-east’s key specialist contractors. Brendan Kerr, its managing director, says the market is tough. “We always knew 2010 was going to be worse than last year and it’s every bit as bad as we predicted.” Keltbray’s work on jobs such as the Pinnacle and Shard is coming to an end and as part of a diversification strategy it has moved into rail - but is at the mercy of cuts in Network Rail’s budget.
Kerr is seeing some uplift in the commercial market and is fielding calls from clients in the industrial sector too. He has marked the beginning of next year as the time when he finds out if this improvement is a true or false dawn.
He is also adjusting to the post-boom years. “I don’t think we will ever see what we saw three years ago. To be honest, we don’t want that back. Everything was out of control.”
The hedger: Costain
£18.1m Pre-tax profit
In the past few years Costain has been refocusing its business around markets such as waste, nuclear power, water and road maintenance. Andrew Wyllie, its chief executive, thinks these are safer bets than most. He says: “We’ve been deliberately targeting those customers whose spends will take place because of regulation, legislation or strategic needs.”
After the recession, Wyllie predicts that a premier league of eight or fewer contractors will emerge. “What we’re seeing is our biggest customers wanting more for less. It’s up to us as an industry to step up to the challenge. We have to provide expertise, innovative solutions and be on time and on budget.”
The pragmatist: Redrow
£140.8m Pre-tax loss
Steve Morgan is best known outside the industry as the man who tried to buy Liverpool football club before the now hugely unpopular Americans Tom Hicks and George Gillett nabbed it. Within the industry, he made the headlines by returning to the firm he created last March just in time to announce the worst set of results in the company’s history.
Morgan seems to be making good his determination not to repeat that result. Interim pre-tax losses have been narrowed 81% to just £8.7m - even so, Morgan says the market will remain challenging for the remainder of 2010.
He has rolled out a new kind of family house, the New Heritage Collection, of which he says: “Customer response has been extremely positive and both sales rates and pricing
Like his peers, his bête noires remain the planning process, which still continues to glue up starts, and mortgage availability. “Until the dual issues are resolved, the housebuilding industry has little hope of making real inroads into the country’s chronic shortage of housing,” he says.
The traveller: Primus
£1.5m Pre-tax profit
This contractor was set up in early 2007 by Martin Tidd, the former Multiplex managing director. It specialises in hotels, interiors and residential work. “Last year was tough,” says
Tidd, who knows a thing or two about crises, having joined Multiplex in 2004 just as the problems with Wembley stadium were starting to make headlines.
“There is a slow pick up in confidence. People are sitting on cash and getting bored. Now real tendering opportunities are coming through and there’s an increase in enquiries relating to distressed projects where the developer or builder has gone bust.”
Primus Build, which has 40 employees, is not on this year’s list, but plans to get onto it by increasing turnover to £200m by 2013. Tidd’s main concern is that much larger firms will bid for the £10m contracts that he specialises in. “Our biggest threat is if they discount at a level that we can’t compete with. That kind of thing goes all the way down the food chain.”
As a result, Primus has expanded abroad where it focuses on high-end residential work such as villas, and has set up offices in Kuwait and the Ukraine, as well as establishing a joinery factory in Dubai.
The activist: McLaren Construction
£3.2m Pre-tax profit
“We haven’t just sat back,” says group managing director Philip Pringle. “We’ve gone out and created business.”
The firm has just won a £45m project to build a training ground for Tottenham Hotspur, and recently gained a place on the Royal Mail’s four-year framework. Other successes are in the hotel and supermarket sectors. The reward has been an 88% rise in pre-tax profit in the year to 31 July 2009, from £1.7m to £3.2m.
Pringle says more schemes are going into planning with an end-user signed up, but he still expects another year of being in the economic mire. He says the trend of big firms chasing smaller jobs will be around for some time yet. “I think as more of the public sector belt gets tightened those firms will be looking at private and commercial work. I think there’s another good 12 months of it.”