Paul Sheffield says strong construction margins of 2.5% due to firm avoiding ‘ultra competitive bidding’

Paul Sheffield - Kier

Source: Matt Leete

Kier has reported a strong performance last year, with profit of £70m across the group on revenue of £2bn, with an operating margin in its construction business of 2.5%.

Reporting its results for the year ended 30 June 2012, the firm said the group turned over £2.07bn, down 5% from £2.18bn the previous year, with pre-tax profit up 2% on the previous year to £70m.

Revenue in the firm’s construction business stood at £1.38bn, down 4% on the previous year, which the firm said “reflected the challenging UK building market”.

The firm said half its contract awards were in the public sector, with it predicting that the balance of public-private work would stabilise at that level.

Operating profit within Kier’s construction business fell 10% to £35.2m - but the firm said its operating margin of 2.5% represented a “good performance”.

Speaking to Building, Kier chief executive Paul Sheffield said it had been a “very tough year” but the firm had come through it with “a good set of numbers”.

He said the strong margin performance was largely the outcome of work secured in 2009-10 as well as high proportion of “good quality work” - around two thirds- secured through frameworks.

“But you can’t avoid competitive bidding altogether - around a third of the work we are doing is secured through the ultra competitive market place - but even there we try to secure jobs where there is a big technical content rather than just lowest price,” he said.

“The competitive market is not a comfortable place to be. In the construction market place what we see this year is going to repeat itself for the next couple of years.”

“We also have a very prudent and conservative profit recognition policy in the business and we don’t trade profit pretty much towards the end of our contracts, which is very different to many of our competitors,” he said.

However, Sheffield said he expected to see the construction margin fall to around 2% next year as market conditions remained challenging. “There’s no doubt that the next 24 months are going to be difficult as well, but we’ve got a lot of bright spots,” he said.

He said infrastructure and civils comprised around £180m of the construction revenue - about 13% of total revenue - which he said was expected to rise to £250m next year.

Overseas revenue hit £70m - about 5% of total construction revenue - with the firm expecting to push that to £150m by June 2014 and £200m by 2015.

Sheffield welcomed the government’s recent announcements on infrastructure, but said a lot of detail remained to be worked through, with challenges remaining in unlocking pension fund cash to drive investment. “I’m delighted the government has picked out our industry as a key driver of growth, but we need to actually get flesh on the bones on how it’s going to work,” he said.

However, he said he was frustrated with the slow progress in bringing schools work, through the £2.4bn Priority Schools Building Programme, to market, with the £2bn PFI element of the programme not now expected to come to market until early next year, nearly a year later than planned.

“It’s a frustration to everybody. I’m not factoring any of that into my future order book. My personal feeling is every Tom, Dick and Harry is waiting for it and it could be a very competitive battle to win that work,” he said.

The firm said 37% of its construction revenue came through education work - down from 43% last year - but this was predicted to fall to 28% next year.

Sheffield said he was particularly pleased with the strength of the order book - with a construction order book worth £2.2bn and a service order book of £2.1bn giving a combined order book of £4.3bn -as well as the firm’s strong cash position, with net cash of £129m (2011: £165m) after investment of £50m during the year.

He said the firm’s property division had performed above expectations, with revenue down 4% to £241m but operating profit up 44% to £22m (2011: £15.3m).

He said that following the award of the £240m Watford Health Campus contract in August, the property division’s pipeline of £750m at year end was now approaching £1bn.

The results showed revenue in the services business was down 8% on last year at £445m, which was dragged down by a fall of 20% in revenue in the maintenance arm to £280m.

Sheffield said this was expected and was largely due to local authorities cutting their budgets. However, he said he expected service to be a growth area in 2013 and 2014.

He said: “We have been pretty cautious about when we saw growth coming in services. A lot of our peers were more enthusiastic about that growth than we were.

“We always thought it would be more 2013-2014 purely because of the difficulties local authorities were going to have in assessing what their budgets were and how they were going to procure work in the future.

“But we are actually seeing a huge amount of tender work right now, but these tenders do take time, so I think we’re still pretty confident that the sector will grow in 2013-14. I think it is going to be growth story over the next few years.”

Operating profit across the services business fell slightly to £20.1m (2011: £21.7m), with an operating margin of 4.5%.

The firm reported redundancy costs of £7m for the year, including £5m in its maintenance division, which Sheffield said was an outcome of the drop in local authority work.

He said: “In anyone area of output if you have a £20m contract in one area and then the next year the client reduces the £20m to £18m then you’ve got to do a little bit of trimming of the workforce to suit the budget. It’s been little by little across the country but it’s just part of good business practice.”