A year ago, construction stocks slid and firms stampeded into services. Now, the City loves the industry. We ask why building's so bullish
How quickly things change. A year ago, it seemed that the chief executive of every quoted contractor in Britain was gazing despairingly at their plummeting share price, then rushing to the stock exchange to reclassify their company as a services provider – whatever that was.

Now, suddenly, building is back in fashion. As James Carnegie, a construction analyst for broker Schroder Salomon Smith Barney, puts it: "Construction is not a dirty word any more."

For every rebranded company – Amey, Peterhouse, Jarvis and Interserve – there is another that is using its reliance on contracting as a selling point. With a volatile stock market, the steady, if unspectacular, returns of Kier, Skanska, Balfour Beatty, Mowlem and Morgan Sindall seem rather attractive. And over the next three years, with the government planning to invest £19bn in the construction of hospitals, schools, and transport links, the City's attraction to contractors is likely to grow – market conditions notwithstanding.

The firms that did rebrand themselves as support services providers insist that their future lies in PFI contracts, facilities management and consultancy. Some maintain a small presence in contracting, although others, such as Laing and Allen (now rebranded as Speedyhire), have turned their back on the business completely.

But Carnegie believes that the stampede out of contracting is over. For one thing, none of the companies left in construction is suitable for the change. "Those companies that have moved over have been, in the construction sense, the weaker companies. They had to have something special to catch people's attention."

The companies that switched – there were five in two years – generally had their decision validated by rising share prices. This was because they offered investors a cheaper route into the support services sector than market leaders such as Capita and Circa. However, this year the City has finally woken up to the growing evidence that there is good money to be made from the companies still in construction. Consequently, those that sat tight have seen their share prices rise as well.

Those that have moved over to services have been, in the construction sense, the weaker companies

James Carnegie, analyst, Schroder Saloman Smith Barney

Another factor adding to the attractiveness of the old-fashioned contractor is a lessening of competition. The departure of companies for the services sector took some capacity out of the market, and left the firms that stayed with bulging order books. Meanwhile, the fall from grace of IT and telecoms companies over the past year has given investors an incentive to appreciate those order books. As a result, contractors, analysts and investors can see that there is a gap in the market.

"For these companies still in construction there is a good opportunity because a lot of the capacity has left but clients still need their projects done," says Stephen Rawlinson, construction analyst with stockbroker Peel Hunt. "They are saying, 'If we can do it well, we can get a bit out of it and make some money'."

This a view with which the building brigade heartily concurs. But as far as contractors are concerned, nothing has changed – just the City's fads. Colin Enticknap, chief executive of family-owned Willmott Dixon, is one who believes that construction "has always been a good sector – but you have to want to do it. It slightly irritates me that the City has never cottoned on to the fact that construction is fashionable."

Willmott Dixon's core business is contracting but also has social housing, fit-out and facilities management divisions. It is in negotiations to buy an M&E business.

The 1-3% margins in construction cannot compete with the 4-8% found in the services sector. But those companies doing construction well are still a good bet for the City and shareholders. "Kier is an unashamedly old-style contractor and they are very good at it," says Alastair Stewart, an analyst with Credit Lyonnais. "But we will see the clever construction groups being all-round providers aiming for 3% margins soon and 5% in five years' time."

Perhaps, then, it is wrong to simply juxtapose builders and service providers. Perhaps, at the risk of sounding Blairite, there is a third way. According to Stewart, the smart builders are complementing their construction businesses with FM, housebuilding, fit-out and civil engineering operations. Construction is just part of the overall strategy, and how far the emphasis shifts from construction depends on the company.

Only a certain number can do PFI, whereas with traditional contracting any man and his dog could start a firm

Alastair Stewart, analyst, Credit Lyonnais

Mowlem is one of the new builders shifting its emphasis towards services while keeping construction at its core. Chief executive John Gains is certain that there are benefits in having both to offer to clients. "We want whole-life involvement. We are proud of our construction business. It is something that we know well and we're happy to be there but we also have to increase the amount of services we do," he says. Mowlem, which is expected to have a turnover of £1.6bn this year, is aiming for a half-and-half split between construction and services.

Gains can see the risk faced by companies that are pulling up their construction roots. "It's all a matter of degrees. Some are still dominated by construction and are some are dominated by support services. We're not giving away what we already know and what allowed us to do what we have."

Rawlinson agrees: "Laing, in abandoning construction, has become an investment vehicle for PFI. But the risk is that you get too far away from the reality of building."

In sticking with construction, companies are looking to raise their margins by eliminating bad and costly contracts, streamlining their supply chain and establishing long-term relationships with key clients. This has seen partnering and strategic alliances become increasingly important to the firms. Rather than just build a factory for client and move on, firms are trying to get continuing work. Although competitive tendering is likely to become less important, many firms are realistic enough to know that it will always be the preferred option for some clients.


In some instances, contracting turnover figures are inflated by the inclusion of money from FM and/or property. Companies affected include: Balfour Beatty, McNicholas plc, Galliford Try, Drake & Scull, Willmott Dixon, Osborne, Henry Boot and Mansell. In most cases this results in an upwardly distorted contracting profit figure.

KEY to all tables

* full split of activities not provided in reports and accounts, therefore turnover and/or profits assigned to main activity
** total profit refers to pre-tax profit. Breakdowns refer in most cases to operating profits before exceptional items. Total of profit breakdown plus interest etc = pre-tax profit
*** interest etc refers in general to net interest payments/receipts, exceptional items, and other non-trading income or losses
† FM activity included within contracting data in other tables
†† pre-tax measure
††† based on results of top 50 companies

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