好色先生TV

Today, or hereabouts, should have been the moment of reckoning. Spring should have been Brexit season. And the entire past year should have been run-up-to-Brexit year. 

Firms across finance, manufacturing, agriculture and health have been bitterly banging on about Brexit and its implications for months. And yet construction firms hardly mentioned it in their results. It was there, sure, but it wasn鈥檛 near the top of what anyone had to say. 

That鈥檚 not because Brexit won鈥檛 affect the industry. Partly, it鈥檚 because nobody knows quite how it will, though: the availability of European labour is not a cliff-edge issue, and it鈥檚 hard to say what will happen to the price and prevalence of materials. But mostly it is because contractors are more concerned about the same-old problems as ever: getting margins up and problem jobs out. 

On this front, the 2019 results season for the listed construction firms has been a mixed bag. Britain鈥檚 third-largest contractor, Interserve, didn鈥檛 manage to stay afloat between declaring its 拢111m loss in February and now of course. 

But the slow-motion nature of its crash into administration at least prevented shrapnel tearing through everyone else鈥檚 balance sheets 鈥� as with the bombshell of Carillion鈥檚 abrupt liquidation last January. Some firms actually had a pretty decent year. 

So here are the results in review: the good, the bad 鈥� and Interserve. 

The good

In mid-February Galliford Try was the first to report, telling investors about its solid but unremarkable start to the year. Pre-exceptional turnover for the half-year to 31 December 2018 dipped 5% year-on-year, but profit was up by 4% at the not-to-be-sniffed-at figure of 拢84m. 

For a company that launched a rights issue one year ago this week, that is not a bad position. It has been helped by Linden Homes and by its regeneration and partnerships division, which both reported turnover above 拢280m and record margins of 19.6% and 5.1% respectively. But its construction margin stayed rock solid at 0.9%, still well under 2%, the goal Galliford has been aiming for over several years now.

But the problem job that prompted the cash call was the Aberdeen bypass, and despite its completion in February, Galliford has had to shell out yet another 拢26m during this half-year 鈥� on top of the 拢150m that had already gone before it. 

鈥淪ince the global financial crisis house prices have recovered, building material prices have recovered, but the price of offering contracting services has not moved鈥�

Tony Williams, 好色先生TV Value

The contractor also baked in an undisclosed amount of compensation for the job, as it argues, along with JV partner Balfour Beatty, that client Transport Scotland should be forced to cough up for some of the 300-plus utility diversions it had to deal with. In other words, more pain is to come if the contractors don鈥檛 have their way with the Scottish transport agency. 

Tony Williams, construction analyst and founder of 好色先生TV Value, says the firm is doing fine. 鈥淚t has lost its way since Greg Fitzgerald [CEO from 2005 to 2015] left but they鈥檙e okay; it will continue to move forward.鈥� 

One firm likely to make Galliford Try jealous is Morgan Sindall, which posted good-and-getting-better results for the third year in a row. In the year to 31 December 2018 it achieved a 2% construction margin, with an overall operating margin of 2.9%. Its revenue was up, at just a shade below 拢3bn, and pre-tax profit jumped by a whopping 23% to 拢82m.  

Chief executive John Morgan is within his rights to boast about the firm鈥檚 average daily net cash being 拢99m. 鈥淚t really enables you to make long-term decisions rather than going for short-term jobs,鈥� he told 好色先生TV last month. 鈥淭here is a lot of talk about the construction model being bust. It鈥檚 not bust but you need balance sheets to be strong so you make the right decisions in the medium to long term.鈥� Some of his peers in trickier positions would no doubt agree. 

Another long-time leader who has seen his firm to a better position is Costain鈥檚 Andrew Wyllie, who is due to leave the contractor in May after 14 years to pursue a non-executive career. In 2018 the firm went for consolidation, with its turnover down 13% in the year to 31 December but pre-tax profit only fractionally reduced at 拢40m. Of Costain鈥檚 拢1.5bn revenue, 拢1.1bn was drawn from infrastructure work, with the remaining 拢400m from its natural resources division. 

Wyllie told 好色先生TV last month the industry is 鈥渋ncomparable鈥� to when he took over as chief executive back in 2005: 鈥淭here is undoubtedly the ability to make good margins, and there have never been as many opportunities as now.鈥� On this point, other chief executives may demur. 

But Wyllie also hints towards a broader truth, namely that Costain is well suited to a market anticipating a hefty infrastructure pipeline 鈥� even if sub-sectors such as commercial are shrinking. 鈥淎 fourth industrial revolution鈥�, says Wyllie, 鈥渨ill have huge implications on infrastructure 鈥� massive opportunities 鈥� and for organisations that are well positioned to benefit from those I think the industry is in a very good place.鈥� 

The un-Beattable 

Another firm likely to reap the benefits of the UK鈥檚 拢600bn infrastructure pipeline is Balfour Beatty. Its similarities to Costain don鈥檛 end there: the nation鈥檚 largest contractor also reported a hike in margins on the back of reduced turnover. 

Five years after posting a 拢304m pre-tax flop 鈥� an annual loss so big it would even make heads spin and eyes water over at Interserve 鈥� the country鈥檚 largest contractor is in a completely different place.

It made another huge loss the year after, then scraped 拢8m of profit in 2016, followed by 拢117m in 2017. In its most recent results, for the year to 31 December 2018, Balfour Beatty shows it has built on the turnaround achieved the previous year, trimming its revenue to 拢7.8bn 鈥� down from 拢8.3bn 鈥� and reporting a small bump in pre-tax profit to 拢123m. Its operating margin was 2.4%. 

鈥淏alfour Beatty鈥檚 transformation has gone beyond resolving the legacy issues of forced growth,鈥� said the firm鈥檚 chief executive Leo Quinn in his review of the firm鈥檚 results. 鈥淭he group鈥檚 strong competitive positions in large and growing infrastructure markets [鈥�] provide the ability to deliver profitable managed growth.鈥�

Quinn echoed Morgan when he declared: 鈥淐ash remains Balfour Beatty鈥檚 compass and ultimately the most reliable barometer of financial performance.鈥� Balfour Beatty鈥檚 average net cash throughout the year was 拢192m 鈥� up from 拢42m the year before. 

For Tony Williams, Quinn has done a 鈥渞emarkable job鈥� at steadying the ship after his predecessors brought trouble by chasing margins. He says: 鈥淭hey went on an acquisition spree and it very nearly went under. Without Quinn they could have gone bust 鈥� or perhaps more likely broken themselves down and sold off piece by piece.鈥� 

The bad

Groundworks specialist Keller only just slips under this heading, as it reported a 拢8.4m pre-tax profit, but sadly this translated into an overall loss of 拢14m for the year to 31 December 2018. With just 2% of its 拢2.2bn revenue earned in the UK, the firm hardly tells us much about the domestic construction market, though. If anything, the firm is still happy in the UK, where it is listed, as infrastructure investment is also good news for foundation diggers. 

But its results are telling about the firm itself. Keller spent 拢64m restructuring its business in the face of problem jobs across a handful of territories: closing its heavy foundations division in Singapore and Malaysia, restructuring its Waterway business in Australia and downsizing operations in Brazil and South Africa in the face of adverse market conditions. 

It鈥檚 not the only UK construction firm to have run into trouble overseas. In the past year private contractor Laing O鈥橰ourke has written off a further 拢26m on a Canadian hospital contract 鈥� and reported a 拢43m annual loss, its third in a row. Interserve has been stung on a number of contracts in Qatar. And Kier made a net loss on the disposal of its Australian highways business. It was only last year that Balfour Beatty鈥檚 Leo Quinn was celebrating his firm鈥檚 exit from the Middle East 鈥� 鈥渁 real drain in resources鈥�.  Could Brexit Britain be a bit more inward-looking for the big construction firms?

Leaving that thought aside, we move on to Kier, the country鈥檚 second-biggest contractor. Its results for the year ended 30 June 2018 struck many as not so bad for a company that suffered a crisis of market confidence in late 2018 when it was hit by a wave of short selling on the stock exchange: it reported a pre-tax profit of 拢137m from a turnover of 拢4.5bn. 

But any glow from that was soon to wear off: the firm also reported average net debt of 拢375m 鈥� and it was getting bigger, not smaller. In early December 2018, Kier crashed out of the FTSE250 after it launched an emergency rights issue, asking investors for 拢264m to pay down its debt load.   

For shareholders who saw their stock diluted, results for the half-year to 31 December made no reparation. Kier made a 拢35.5m pre-tax loss, after being forced to write off 拢25m on a hospital job and pay for a bunch of other non-underlying items. One of these is a 拢26m payment, phased over six years, for cutting loose an unprofitable waste collection contract 鈥� meaning the firm will have to deduct 拢2m from future operating profit for the next half-decade. And to pile more salt into investors鈥� wounds, it also discovered an 鈥渁ccounting error鈥� whereby its net debt was 拢50m higher than previously thought. 

And Interserve 

The biggest loser, obviously, was Interserve. Back in February, when it was still a publicly-listed company, it announced an 拢111m pre-tax loss for the year to 31 December 2018. This loss was 54.5% smaller than the previous year鈥檚 loss of 拢244m, but it was nevertheless down on 2016 when it reported 鈥� a pre-tax loss of only 拢95m. 

Looking back, it鈥檚 amazing the firm lasted so long. Chair Glyn Barker told shareholders earlier this month that the contractor 鈥渄id not have a particularly strong鈥� balance sheet in early 2016 鈥� to the extent that the board had considered launching a rights issue. But this idea went out the window when a handful of the energy-from-waste contracts started to turn really sour later that year. 

In this respect 2018 was much the same for Interserve as the two years before. A refinancing in spring did not provide it with long-term stability. It did not complete a single one of its four unfinished energy-from-waste jobs due in 2017. The client for the one such job that it had previously finished 鈥� or at least, had been thrown off 鈥� claimed it was still owed 拢64m (and incidentally, still does). 

The company looks the same and acts the same for now, but may not do so for much longer. Kevin Cammack, construction analyst at Cenkos Securities, says Interserve鈥檚 new owners 鈥� who wrote off more than 拢800m 鈥� will take a proactive approach to making their money back. He expects to see its RMD Kwikform arm disposed of within nine months, along with all or part of Interserve鈥檚 拢1.7bn FM business, and then chunks of its Middle East and construction businesses sold off thereafter. 鈥淢y expectation is that by 2021 Interserve as we know it will not exist,鈥� he says. 

Margins 

好色先生TV Value鈥檚 Williams is not optimistic about contracting margins in the short term. 鈥淪ince the global financial crisis house prices have recovered, building material prices have recovered, but the price of offering contracting services has not moved,鈥� he says. 鈥淭here is more capacity than there is work and I cannot see that the pricing will recover soon.鈥� 

Therein lies a problem for some firms who have chased turnover through suicidal bidding and acquisitions, and now find themselves with painful problem jobs or mounting debt piles. 

Balfour Beatty was undoubtedly among the worst offenders for this in the wake of the 2008 recession but in a sense was lucky that things came to a crunch earlier for it than for others 鈥� giving the company a chance to restructure and replenish its cash position. The failure of margins to improve in the contracting sector since 2014 means banks are increasingly unwilling to lend, insurance costs have gone up, and interest rates have slowly risen. 

The next year could well see more firms consolidating 鈥� reducing their turnover, trying to boost margins, and retreating from far-flung places or sectors they know less well than they should. 

鈥淲hile the sector is not desperately exciting, it is still forecast to grow at 1%-2% a year 鈥� like the rest of the economy,鈥� says Williams. 鈥淭here is enough there for firms to prosper and grow.鈥� Contractors with a decent stake in housebuilding and infrastructure can relax a little, while those heavily exposed to commercial are probably facing a tougher time. 

That is assuming, of course, Brexit doesn鈥檛 knock the sector sideways.