Ernst & Young construction boss warns stakeholder confidence in sector at ‘an all-time low’
Contractors already reeling from financial woes in the first half of this year have been told there will no respite in the short term with the number of profit warnings expected to reach a nine-year high and access to credit drying up.
Listed firms forced to tell investors they are revising down their numbers so far in 2019 have included Kier, which has also announced it is getting rid of 1,200 people by the middle of next year, Galliford Try, which continues to be hobbled by problem contracts in Scotland, and Costain which last month shocked the markets when it said delays to schemes would hit its year-end figures.
Ian Marson, the UK head of construction at Ernst & Young, said the volume of profit warnings since the beginning of the year is expected to push the 2019 figure beyond levels not seen since the turn of the decade when the sector was in the teeth of the recession.
He said: “Profit warnings [are] at their highest level since 2011. By the run rate so far this year, it will take profit warnings to above the 2011 level by the end of the year. They are already at the 2010 level, by half-year, which is pretty incredible if you think about it.”
And he said laying off hundreds of staff – Galliford Try has also said it plans to cut 350 jobs by the end of the summer – would not fix a firm’s finances. Instead, he suggested contractors needed to improve their cash positions and contract management.
But he warned that banks that have traditionally provided firms with finance in the past were beginning to lose confidence in the sector because of the continuing low margins and the fallout following Carillion’s collapse last year.
He said: “The investors who were there three or four years ago are actively withdrawing from the sector and that is primarily down to margin. They don’t see this as a place they are going to get the returns they need for their own investors.”
Marson, who was speaking at a Building Live Club event last week, said firms, struggling under a pile of debt, were facing a shock when they came to sorting out their refinancing.
“Those with nearing debt maturities on their bonds, they need to be thinking very quickly,” he warned. “Those with very high levels of gearing and debt also need to be thinking very quickly because when they come to refinance, the financing will not be there.”
Marson said stakeholder confidence in the industry was at “an all-time low”, adding: “If the question is: is there debt funding there for the industry, the answer is quite simply ‘no’.”
The firm’s share price has been steadily falling for weeks now, down from 278p on 31 May – the last day of trading before a profit warning on 3 June which saw its shares slip to 164p.
They sank again to 131p less than two weeks later when chief executive Andrew Davies announced a restructuring on 14 June which, along with the redundancies, will see the firm sell off a number of businesses.
On 10 July last year, Kier shares traded for 958p.
Listen to this week’s Building podcast where reporters Jordan Marshall and Will Ing discuss contractors’ continued struggles.