It’s that time of year again – the UK contractors’ financial results are in. We know it’s been a bad year for Interserve, but how have the rest of them done? And how well positioned are they, heading into the raging uncertainties of 2019?
Today, or hereabouts, should have been the moment of reckoning. Spring should have been Brexit season. And the entire past year should have been run-up-to-Brexit year.
Firms across finance, manufacturing, agriculture and health have been bitterly banging on about Brexit and its implications for months. And yet construction firms hardly mentioned it in their results. It was there, sure, but it wasn’t near the top of what anyone had to say.
That’s not because Brexit won’t affect the industry. Partly, it’s because nobody knows quite how it will, though: the availability of European labour is not a cliff-edge issue, and it’s hard to say what will happen to the price and prevalence of materials. But mostly it is because contractors are more concerned about the same-old problems as ever: getting margins up and problem jobs out.
On this front, the 2019 results season for the listed construction firms has been a mixed bag. Britain’s third-largest contractor, Interserve, didn’t manage to stay afloat between declaring its £111m loss in February and now of course.
But the slow-motion nature of its crash into administration at least prevented shrapnel tearing through everyone else’s balance sheets – as with the bombshell of Carillion’s abrupt liquidation last January. Some firms actually had a pretty decent year.
So here are the results in review: the good, the bad – and Interserve.
Linden Homes and its regeneration and partnerships division both reported turnover above
and record margins of
19.6% and 5.1%
Kier made a
pre-tax loss, after being forced to write off
on a hospital job and pay for a bunch of other non-underlying items.
Interserve didn’t manage to stay afloat after declaring its
loss in February
Keller reported a
pre-tax profit, but sadly this translated into an overall loss of
for the year to 31 December 2018.
Laing O’Rourke has written off a further
on a Canadian hospital contract – and reported a
annual loss, its third in a row
In mid-February Galliford Try was the first to report, telling investors about its solid but unremarkable start to the year. Pre-exceptional turnover for the half-year to 31 December 2018 dipped 5% year-on-year, but profit was up by 4% at the not-to-be-sniffed-at figure of £84m.
For a company that launched a rights issue one year ago this week, that is not a bad position. It has been helped by Linden Homes and by its regeneration and partnerships division, which both reported turnover above £280m and record margins of 19.6% and 5.1% respectively. But its construction margin stayed rock solid at 0.9%, still well under 2%, the goal Galliford has been aiming for over several years now.
But the problem job that prompted the cash call was the Aberdeen bypass, and despite its completion in February, Galliford has had to shell out yet another £26m during this half-year – on top of the £150m that had already gone before it.
“Since the global financial crisis house prices have recovered, building material prices have recovered, but the price of offering contracting services has not moved”
Tony Williams, Building Value
The contractor also baked in an undisclosed amount of compensation for the job, as it argues, along with JV partner Balfour Beatty, that client Transport Scotland should be forced to cough up for some of the 300-plus utility diversions it had to deal with. In other words, more pain is to come if the contractors don’t have their way with the Scottish transport agency.
Tony Williams, construction analyst and founder of Building Value, says the firm is doing fine. “It has lost its way since Greg Fitzgerald [CEO from 2005 to 2015] left but they’re okay; it will continue to move forward.”
One firm likely to make Galliford Try jealous is Morgan Sindall, which posted good-and-getting-better results for the third year in a row. In the year to 31 December 2018 it achieved a 2% construction margin, with an overall operating margin of 2.9%. Its revenue was up, at just a shade below £3bn, and pre-tax profit jumped by a whopping 23% to £82m.
Chief executive John Morgan is within his rights to boast about the firm’s average daily net cash being £99m. “It really enables you to make long-term decisions rather than going for short-term jobs,” he told Building last month. “There is a lot of talk about the construction model being bust. It’s not bust but you need balance sheets to be strong so you make the right decisions in the medium to long term.” Some of his peers in trickier positions would no doubt agree.
Another long-time leader who has seen his firm to a better position is Costain’s Andrew Wyllie, who is due to leave the contractor in May after 14 years to pursue a non-executive career. In 2018 the firm went for consolidation, with its turnover down 13% in the year to 31 December but pre-tax profit only fractionally reduced at £40m. Of Costain’s £1.5bn revenue, £1.1bn was drawn from infrastructure work, with the remaining £400m from its natural resources division.
Wyllie told Building last month the industry is “incomparable” to when he took over as chief executive back in 2005: “There is undoubtedly the ability to make good margins, and there have never been as many opportunities as now.” On this point, other chief executives may demur.
But Wyllie also hints towards a broader truth, namely that Costain is well suited to a market anticipating a hefty infrastructure pipeline – even if sub-sectors such as commercial are shrinking. “A fourth industrial revolution”, says Wyllie, “will have huge implications on infrastructure – massive opportunities – and for organisations that are well positioned to benefit from those I think the industry is in a very good place.”
Another firm likely to reap the benefits of the UK’s £600bn infrastructure pipeline is Balfour Beatty. Its similarities to Costain don’t end there: the nation’s largest contractor also reported a hike in margins on the back of reduced turnover.
Five years after posting a £304m pre-tax flop – an annual loss so big it would even make heads spin and eyes water over at Interserve – the country’s largest contractor is in a completely different place.
It made another huge loss the year after, then scraped £8m of profit in 2016, followed by £117m in 2017. In its most recent results, for the year to 31 December 2018, Balfour Beatty shows it has built on the turnaround achieved the previous year, trimming its revenue to £7.8bn – down from £8.3bn – and reporting a small bump in pre-tax profit to £123m. Its operating margin was 2.4%.
“Balfour Beatty’s transformation has gone beyond resolving the legacy issues of forced growth,” said the firm’s chief executive Leo Quinn in his review of the firm’s results. “The group’s strong competitive positions in large and growing infrastructure markets […] provide the ability to deliver profitable managed growth.”
Quinn echoed Morgan when he declared: “Cash remains Balfour Beatty’s compass and ultimately the most reliable barometer of financial performance.” Balfour Beatty’s average net cash throughout the year was £192m – up from £42m the year before.
For Tony Williams, Quinn has done a “remarkable job” at steadying the ship after his predecessors brought trouble by chasing margins. He says: “They went on an acquisition spree and it very nearly went under. Without Quinn they could have gone bust – or perhaps more likely broken themselves down and sold off piece by piece.”
Groundworks specialist Keller only just slips under this heading, as it reported a £8.4m pre-tax profit, but sadly this translated into an overall loss of £14m for the year to 31 December 2018. With just 2% of its £2.2bn revenue earned in the UK, the firm hardly tells us much about the domestic construction market, though. If anything, the firm is still happy in the UK, where it is listed, as infrastructure investment is also good news for foundation diggers.
But its results are telling about the firm itself. Keller spent £64m restructuring its business in the face of problem jobs across a handful of territories: closing its heavy foundations division in Singapore and Malaysia, restructuring its Waterway business in Australia and downsizing operations in Brazil and South Africa in the face of adverse market conditions.
It’s not the only UK construction firm to have run into trouble overseas. In the past year private contractor Laing O’Rourke has written off a further £26m on a Canadian hospital contract – and reported a £43m annual loss, its third in a row. Interserve has been stung on a number of contracts in Qatar. And Kier made a net loss on the disposal of its Australian highways business. It was only last year that Balfour Beatty’s Leo Quinn was celebrating his firm’s exit from the Middle East – “a real drain in resources”. Could Brexit Britain be a bit more inward-looking for the big construction firms?
Leaving that thought aside, we move on to Kier, the country’s second-biggest contractor. Its results for the year ended 30 June 2018 struck many as not so bad for a company that suffered a crisis of market confidence in late 2018 when it was hit by a wave of short selling on the stock exchange: it reported a pre-tax profit of £137m from a turnover of £4.5bn.
But any glow from that was soon to wear off: the firm also reported average net debt of £375m – and it was getting bigger, not smaller. In early December 2018, Kier crashed out of the FTSE250 after it launched an emergency rights issue, asking investors for £264m to pay down its debt load.
For shareholders who saw their stock diluted, results for the half-year to 31 December made no reparation. Kier made a £35.5m pre-tax loss, after being forced to write off £25m on a hospital job and pay for a bunch of other non-underlying items. One of these is a £26m payment, phased over six years, for cutting loose an unprofitable waste collection contract – meaning the firm will have to deduct £2m from future operating profit for the next half-decade. And to pile more salt into investors’ wounds, it also discovered an “accounting error” whereby its net debt was £50m higher than previously thought.
In context: A timeline of Interserve’s financial woes
The biggest loser, obviously, was Interserve. Back in February, when it was still a publicly-listed company, it announced an £111m pre-tax loss for the year to 31 December 2018. This loss was 54.5% smaller than the previous year’s loss of £244m, but it was nevertheless down on 2016 when it reported … a pre-tax loss of only £95m.
Looking back, it’s amazing the firm lasted so long. Chair Glyn Barker told shareholders earlier this month that the contractor “did not have a particularly strong” balance sheet in early 2016 – to the extent that the board had considered launching a rights issue. But this idea went out the window when a handful of the energy-from-waste contracts started to turn really sour later that year.
In this respect 2018 was much the same for Interserve as the two years before. A refinancing in spring did not provide it with long-term stability. It did not complete a single one of its four unfinished energy-from-waste jobs due in 2017. The client for the one such job that it had previously finished – or at least, had been thrown off – claimed it was still owed £64m (and incidentally, still does).
The company looks the same and acts the same for now, but may not do so for much longer. Kevin Cammack, construction analyst at Cenkos Securities, says Interserve’s new owners – who wrote off more than £800m – will take a proactive approach to making their money back. He expects to see its RMD Kwikform arm disposed of within nine months, along with all or part of Interserve’s £1.7bn FM business, and then chunks of its Middle East and construction businesses sold off thereafter. “My expectation is that by 2021 Interserve as we know it will not exist,” he says.
Building Value’s Williams is not optimistic about contracting margins in the short term. “Since the global financial crisis house prices have recovered, building material prices have recovered, but the price of offering contracting services has not moved,” he says. “There is more capacity than there is work and I cannot see that the pricing will recover soon.”
Therein lies a problem for some firms who have chased turnover through suicidal bidding and acquisitions, and now find themselves with painful problem jobs or mounting debt piles.
Balfour Beatty was undoubtedly among the worst offenders for this in the wake of the 2008 recession but in a sense was lucky that things came to a crunch earlier for it than for others – giving the company a chance to restructure and replenish its cash position. The failure of margins to improve in the contracting sector since 2014 means banks are increasingly unwilling to lend, insurance costs have gone up, and interest rates have slowly risen.
The next year could well see more firms consolidating – reducing their turnover, trying to boost margins, and retreating from far-flung places or sectors they know less well than they should.
“While the sector is not desperately exciting, it is still forecast to grow at 1%-2% a year – like the rest of the economy,” says Williams. “There is enough there for firms to prosper and grow.” Contractors with a decent stake in housebuilding and infrastructure can relax a little, while those heavily exposed to commercial are probably facing a tougher time.
That is assuming, of course, Brexit doesn’t knock the sector sideways.