“Hindsight is a wonderful thing,” says Andrew Brown, an analyst at Panmure Gordon, “but Rok’s first major profit warning was two years ago, related to the slowdown in their regional contracting business.”
This could be forgiven at the time, says Brown, as it was part of a broader downturn, but it pushed Rok to diversify forcing it to take on more debt.
“They set about reducing their exposure; they then started to make quite a few acquisitions, and the indebtedness of the group grew,” Brown says. “The switch from contracting to maintenance also meant that cash wasn’t received up front as much.”
Andrew Nussey, an analyst at KBC Peel Hunt, says that entering a downturn without a financial cushion was the root of the company’s decline: “Rok had been successfully diversifying away from its historical contracting bias but it was overly leveraged in a construction cycle that was heading downwards.”
There was also the Garvis Snook factor, says Brown. His eccentric photo opportunities were highly divisive among investors and meant that confidence in the company ebbed when trouble hit. “Garvis is a character and a lot of investors didn’t like that. If he did ever have issues with the group it would be more difficult to bounce back,” Brown said.
So what does it mean for those left standing? Two major social housing firm failures will spur clients to head for the safety of companies with healthier looking balance sheets, says Nussey.
“We have seen Rok and Connaught disappear and this emphasises the need for clients to go to well capitalised players like Mears or Morgan Sindall.”
But for those left in the market, scrutiny will be tougher when bidding for new work, says Brown.
“From a client’s point of view maybe you are going to be looking at your social housing supply and ask a few more questions. You might find the structure of contracts a little bit more onerous,” he said.