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Sectors and the City: Why contractors are doing better than housebuilders
Housebuilders听听听听听听听
turnover (拢m)change %pre-tax profit (拢m)change %share price (p)eps (p)p/e ratio
Wilson Connolly709.82347.1鈥3017613.812.8
Swan Hill77.7236.1290828.110.1
Wilson Bowden789.59139.2159041048.7
Wimpey1895.910181.22027231.98.5
Persimmon 1477.598188.280427.552.98.1
Taylor Woodrow2149.428202.33221026.28.0
Crest Nicholson608.51053.11022532.66.9
听听听听听听听听
Contractors听听听听听听听
turnover (拢m)change % pre-tax profit (拢m)change %share priceeps (p)p/e ratio
Alfred McAlpine554.04721鈥7.9435.516.326.7
Balfour Beatty3071.0151042023514.416.3
Mowlem1698.01229.52025616.715.3
Carillion1889.8鈥145.1820013.414.9
Amec4467.512116.718426.528.514.9
Interserve1273.03953.62952035.714.7
Peterhouse368.81215.51141029.214.0
Keller422.23523.64934525.813.4
Morgan Sindall909.23920.83542739.810.7
Rok124.9363.8288184.517.310.7
Costain462.9208.725152.56.0
Amey831.019鈥18.3鈥167260.5鈥6.1N/A
The tables above show just how good 2001 was for the construction sector. Across the industry, profits, turnover and earnings per share all increased last year compared with 2000.
The only disappointments were the fall in Wilson Connolly鈥檚 profit and Amey鈥檚 拢18.3m loss, which was mainly due to a change in how the firm accounts for its PFI bid costs. Alfred McAlpine鈥檚 profit fell, but this was because of the sale of its housing arm to Wimpey last September.
The tables also show how much more highly rated contractors are than housebuilders. Housebuilders have an average rating of nine whereas contractors enjoy an average rating of 14.3. Housebuilders鈥 profits and earnings per share are on the whole higher than contractors鈥, which is the central argument used by those pushing for a rerating.
The tables also illustrate that, although Wilcon鈥檚 profit dropped 30% last year, it is easily the highest rated housebuilder. This is because the firm鈥檚 sudden drop in profit has not been matched by a fall in its share price, as the City believes Wilcon鈥檚 long-term prospects are still good.
Contractors have been far more successful at improving their ratings than housebuilders. Contractors such as Amec and Balfour Beatty trade on ratings of up to 16 鈥 not far behind the market average of 17. This has been achieved by moving away from risky one-off contracts to long-term deals such as PFI maintenance contracts.
鈥淚 find the whole ratings issue a mystery. There鈥檚 a bit of a black art to it,鈥 admits Oliver Whitehead, chief executive of Alfred McAlpine. But his firm, with a rating of nearly 27, is the grand wizard among contractors. Its rating has been climbing since last year when it bought a utility company and a facilities manager and, perhaps most importantly, sold its housing division.
The City has gradually rerated contractors over the past two years because they have given the City exactly what it wants 鈥 visible, long-term, guaranteed earnings. The government鈥檚 commitment to improve the railways, schools, roads and hospitals is also playing straight into contractors鈥 hands. 鈥淭he rerating of contractors has occurred because they now have visible earnings from long-term and big contracts,鈥 says Leslie Kent of stockbroker Seymour Pierce. 鈥淭ake the Tube deals: there are huge numbers involved. They can only be good for firms.鈥
The only difficulty facing contractors is convincing the City that Amey鈥檚 dramatic losses last year was a freak event, not to be repeated. The shares of other contractors involved in PFI were hit as the City reacted to Amey鈥檚 shock announcement. 鈥淎mey did the rest of us no favours because the City started looking sideways at our numbers,鈥 says one contractor.
John Messenger, Merrill Lynch鈥檚 building and construction vice president, says the challenge for contractors is to prove the quality of earnings, because construction comes with a lot of risk. 鈥淐ash flow and profits don鈥檛 always work in tandem. It鈥檚 very easy to book a profit and then spend eight years getting the money out of the client.鈥