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TCI Top 100 Construction Companies 2018

21 Sep 18 Carillion’s collapse at the beginning of this year left a gaping hole in the list of Top 100 construction firms. But while other companies have stepped in to fill the space at the top, damage further down the supply chain has been extensive. Steve Menary assesses the prospects for the sector and reviews the financial performance of the new Top 100.

A list of the Top 100 contractors without Carillion on it seems strange. A year ago, turnover of 拢5.2bn easily made Carillion the UK鈥檚 second-biggest contractor. But we all know the old stock market adage that 鈥渢urnover is vanity; profit is sanity鈥 and Carillion failed to heed it. The company imploded spectacularly at the start of this year and is now gone.

The shockwaves from Carilion鈥檚 collapse continue to reverberate and while, at a glance, the results of this year鈥檚 Top 100 suggest steady trading at the top end, the underlying picture is more complicated.

Overall, total turnover of the Top 100 was just over 拢70bn, 8% higher than last year. However, only 98 of this year鈥檚 Top 100 have filed accounts at Companies House for the last two years and combined revenue at those companies was up 7%.

The industry鈥檚 10 biggest contractors generated about 拢32bn of revenue 鈥 46% of the total for the Top 100 鈥 which is broadly similar to the same ratio a year earlier.

The biggest riser was Irish contractor McAleer & Rushe, which broke into the top 50 after surging 14 places into 47th spot.

There was evidence of a tightening in social housing as two major social housing contractors 鈥 Mullaley and Durkan - nearly fell out of the latest Top 100.

Two contractors among the top 10 (Amey and Mace) recorded marginal declines in revenue, but three leading companies 鈥 Interserve, Amey and Laing O鈥橰ourke 鈥 traded in the red.

While 77 companies of the industry鈥檚 Top 100 contractors grew turnover year-on-year in the latest set of annual results, an analysis of profitability showed a different picture.

Total pre-tax profits of this year鈥檚 Top 100 is 拢946.5m, compared to 拢833.6m last year 鈥 an aggregate rise of 15% among those companies reporting two years鈥 figures.

Latest Rank By Turnover Latest Rank By Profit Company Reporting Period Latest Turnover (拢m) Previous Turnover (拢m) Change (%) Latest Pre-tax Profit (拢m) Previous Pre-tax Profit (拢m) Change (%) Latest Margin Previous Margin
1 1 Balfour Beatty plc Dec-17 8,234 8,215 0.2 165 62 166.1 2 0.8
2 17 Kier Group plc Jun-17 4,282.2 4,082.3 4.9 25.8 -34.9 173.9 0.6 -0.9
3 100 Interserve plc Dec-17 3,250.8 3,244.6 0.2 -244.4 -94.1 -159.7 -7.5 -2.9
4 6 Galliford Try plc Jun-17 2,820 2,670 5.6 58.7 135 -56.5 2.1 5.1
5 4 Morgan Sindall Dec-17 2,793 2,562 9 64.9 43.9 47.8 2.3 1.7
6 99 Amey UK plc Dec-17 2,581.3 2,591 -0.4 -189.8 -43.9 -332.6 -7.4 -1.7
7 3 Keller Group plc Dec-17 2,070.6 1,780 16.3 110.6 73.9 49.7 5.3 4.2
8 22 Mace Ltd Dec-17 2,036.9 2,041.1 -0.2 23 10.7 114.4 1.1 0.5
9 98 Laing O鈥橰ourke plc Mar-17 2,034.2 1,629.7 24.8 -80.8 -267.2 69.8 -4 -16.4
10 35 Skanska UK plc Dec-17 1,802.7 1,650.6 9.2 13.5 23.6 -42.9 0.7 1.4
11 10 Costain Group plc Dec-17 1,728.9 1,658 4.3 38.9 30.9 25.9 2.2 1.9
12 48 ISG plc Dec-17 1,708.8 1,329.3 28.5 9.1 4.8 89.6 0.5 0.4
13 13 Wates Group Ltd Dec-17 1,622 1,531.9 5.9 32.9 32.9 0.1 2 2.1
14 11 Willmott Dixon Holdings Ltd Dec-17 1,296.4 1,223 6 33.5 28 19.8 2.6 2.3
15 66 Multiplex Construction Europe Ltd Dec-17 1,155.4 1,035.9 11.5 4.2 16 -73.6 0.4 1.5
16 28 BAM Construct UK Ltd Dec-17 957.5 1,072.2 -10.7 19.3 26.2 -26.3 2 2.4
17 95 Sir Robert McAlpine (Newarthill Ltd) Oct-17 942.5 869.6 8.4 -20.2 -43.2 -53.2 -2.1 -5
18 5 Bowmer & Kirkland Ltd Aug-17 928.3 930.7 -0.3 64.4 61.5 4.8 6.9 6.6
19 15 Mears Group plc Dec-17 900.2 940.1 -4.2 26.5 29.4 -9.8 2.9 3.1
20 2 Homeserve plc Mar-18 899.7 785 14.6 123.3 98.3 25.4 13.7 12.5

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Ranked fifth by profit a year ago, Balfour Beatty is now the most profitable contractor in the Top 100. In the aftermath of Carillion鈥檚 collapse, it is sobering to consider how differently things might have turned out when, three years ago, Balfour Beatty was staring disaster in the face.

Back then, Balfour Beatty was fighting off a hostile takeover bid from Carillion which, at that time, was widely assumed to be in rude financial health.

Balfour鈥檚 saviour was chief executive Leon Quinn, who came on board in 2015 to rescue the ailing giant. The latest figures show that Balfour鈥檚 pre-tax profit surged from 拢62m in 2016 to 拢165m last year, an increase of more than 166%.

Nevertheless, profitability suffered at 38 of the Top 100 contractors and some companies that featured in the Top 100 by turnover a year ago have since fallen out. Revenue halved at Canary Wharf and Solar Century, with the latter suffering from the government鈥檚 decision to cut support for renewables projects from March 2017.

With Carillion鈥檚 failure still reverberating, Brexit looming and economic uncertainty stalking the business community, the construction industry looks unlikely to lose its tag as one of the worst sectors for insolvencies.

The rising cost of materials, a worsening skills shortage, and the perennial curse of problem contracts are haunting the industry. Companies in the Top 100 are increasingly looking for a better source of income than contracting, as signs of tightness are evident throughout the industry.

In the second quarter of this year, three of the 35 companies in the FTSE Construction & Materials sector issued warnings over reduced profits according to research from consultants Ernst & Young (EY).

EY鈥檚 head of restructuring for UK & Ireland, Alan Hudson, said: 鈥淐onstruction sector growth is notoriously hard to assess at any point, but especially after such a cold and wet winter.聽With the outlook in question, it feels like a good time to take stock and think about how construction companies can improve resilience and meet the challenges that lie ahead.鈥

EY was warning about legacy contracts a year ago and there has been a steady stream of profit warnings since the second half of last year, due in part to Carillion and, more recently, problems at Interserve.

At one point, Interserve 鈥 the victim of costly legacy contracts in the energy-from-waste sector 鈥 looked like following Carillion down the slippery slope. But it seems that disaster has been averted and there has since been some progress.

In the 12 months to 31st December 2017, Interserve made a massive loss 鈥 拢244m 鈥 on turnover of 拢3.25bn. But in the first half of 2018, the company reported a pre-tax loss of just 拢6m, but an operating profit of 拢5.6m, from ongoing revenues of 拢396m.

Interserve has had to cut costs. The latest interim results show a 拢6.6m loss resulting from its exit from the London new-build construction sector, 拢10.8m in restructuring costs and 拢32.1m in 鈥榩rofessional adviser fees鈥 connected to a refinancing deal.

Even businesses in better shape than Interserve are making significant but costly changes.

Before underlying items, Kier made a pre-tax profit of 拢126m in the 12 months to June 2017, which was up 8% on the previous year. However, exceptional items 鈥 mainly a 拢75m hit from selling consulting business Mouchel and exiting the Caribbean and Hong Kong markets 鈥 dogged the bottom line and after exceptional items the profit was 拢25.8m, although this was still a big rise on 2016.

In the second half of last year and free of exceptional items, these changes showed through and with no overseas work to dog the business, Kier grew profits 4%.

With the unknown intricacies of Brexit looming, working overseas seems less attractive for most major UK-based contractors these days. And while five of the UK鈥檚 top 20 contractors (Amey, Skanska, Bouygues, Multiplex and Vinci) and 17 of the Top 100 are foreign-owned, working overseas is increasingly uncommon for British contractors.

Laing O鈥橰ourke, which has a substantial presence in the Australian market, recently sold the rail sleeper manufacturing business it had out there for 拢30m. Just over two years ago, the company put its entire Australian construction business up for sale, only to take it off the market again when no buyer came forward.

Asia, Europe and the Middle East provided 16% of ISG鈥檚 revenue, Dawnus works in Africa and nearly half of 碍别濒濒别谤鈥檚 annual turnover comes from North America but the ground-engineering specialist is rare in overseas outpacing UK work.

Only Balfour Beatty and Mace are looking for expansion overseas. Balfour Beatty made a 拢41m profit from the US in 2017 compared to 拢16m from the UK and 拢15m from its Hong Kong subsidiary Gammon.

At Mace, international revenue provided 拢665m of the group鈥檚 turnover of just under 拢2bn in 2017 and helped secure a place among the top 25 privately-owned companies in The Sunday Times Top Track 100.

Mace chief financial officer Dennis Hone said:聽鈥淏y the end of last year we had secured over 80% of our work for 2018, and 30% of our company-wide turnover is now generated by our international businesses. The next five years will be some of the most exciting and transformational in the company鈥檚 history, as we become the global company of choice for complex and iconic projects.鈥

A closer look at profit figures reveals that the average margin at the 79 contractors that recorded a pre-tax profit last year was 2.44%. At those companies that filed two sets of results, the average margin rose to 2.59% from 2.48% in the previous year. However, 13 main contractors traded in the red in their latest results and profitability suffered at 31 of the Top 100 firms.

Of the four main contractors to boast double-digit margins, three (Watkin Jones, Henry Boot and Marshall) all have property development operations, which can boost the bottom line.

Bowmer & Kirkland has a development operation, Peveril, and construction provided just 20% of turnover at Henry Boot with the balance coming from property investments. Morgan Sindall鈥檚 urban regeneration arm brought in a 拢6.1m operating profit on 拢62m of revenue in the first half of this year alone.

Earlier this year, North Midland Construction launched its own development operation, NM Investments, to utilise some 鈥榝ree-flow cash鈥.

With profit margins tightening, development is looking like a safer option to boost the bottom line than acquisitions, but corporate activity aimed at boosting profits has still been in evidence and not just divestments such as Kier鈥檚 sale of Mouchel. Last year, Kier bought 拢180m-turnover utilities contractor McNicholas and it continues to expand via acquisition in the US.

Similarly, electrical contractor TClarke uses its spare cash to fund buyouts, including a 拢2m acquisition of building management specialist ETON.

Like Keller, TClarke is a rarity in that it is a specialist contractor listed on the stock market; it can therefore raise funds without recourse to lenders.

The other 19 specialist contractors in our Top 100 are all privately owned. And life for them, further down the supply chain, is not getting any easier.

Back in 2013, Mears offloaded its mechanical & electrical arm Haydon to the management for 拢1 and three years ago had to write off 拢8m in expected payments from the deal. In the 12 months to June 2017, profits and turnover both fell at Haydon M&E, making Mears鈥 exit look timely despite the hit.

Other specialist contractors have suffered more seriously, with 拢50m-turnover M&E outfit Vaughan Engineering going under in June. Last month, demolition firm Cuddy entered administration and details emerged that SES Engineering 鈥 the specialist group bought by Wates from Shepherd in 2015 鈥 is taking a hit from Carillion鈥檚 demise.

Six of the 21 specialist companies in the latest Top 100 suffered reduced profits. Utilities specialist J Murphy, for example, which is the UK鈥檚 25th biggest contractor by turnover, saw profits virtually halved in 2017.

With turnover of 拢139.9m, Lorne Stewart (another M&E specialist) was one place off the Top 100 but also traded in the red; group chief executive officer Mathew Puliyelethu recently told staff: 鈥淲e must continue to challenge why we are tendering projects. If we have doubt, we simply stay out.鈥

The Specialist Engineering Contractors group was hoping that in the aftermath of Carillion鈥檚 demise, payment conditions would improve. But despite encouraging noises coming from government, it has so far been disappointed.

SEC chief executive Rudi Klein says: 鈥淐ash flow is getting tighter and payments are getting longer. There is a lot of abuse associated with early payment and people looking to get a discount for placing bulk orders.

鈥淕iven the Carillion effect, we were hoping for some dramatic changes in payment security but nothing鈥檚 happened. The government has come out with the new construction sector deal 鈥 and no-one is complaining about that 鈥 but the industry needs to invest in skills and training. But where is the money coming form? Only the supply chain invest.鈥

At the 21 specialist contractors, the average margin from the latest results edged up to 2.59% from 2.56% a year earlier. As subcontractors are starting to experience slower payments, reductions in earnings and tighter margins are likely to become more common as the impact of Carillion鈥檚 collapse and other economic factors have a continued effect on a traditionally tough sub-sector.

鈥淐onstruction has always been a fiercely competitive sector, which impacts on margins,鈥 says Chris Radford, local chair at R3 (better known as the Association of Business Recovery Professionals).

鈥淭here are increases in prices of materials, particularly if they are imported,鈥 he says. 鈥淎t the same time, some of the migrant labour may be choosing to work elsewhere due to the weak pound.鈥

Given that most forecasts for construction growth this year are negative, the prospects for growing margins or even earnings in 2018 look slim without resorting to cutting costs or pushing up bid prices, both of which will have severe implications.

Radford adds: 鈥淐ompanies are set up to turn over a certain amount. A company turning over 拢100m but only bringing in 拢50m of work then has to make cuts and there are costs to those cuts. Construction companies will try to protect themselves against risk. If that continues, then the prices they are offering start to get unattractive.鈥

As the industry enters a period of wider economic uncertainty, achieving that balance looks set to be harder than ever and margins may be set to come down further, certainly amongst main contractors, unless attempts to grow earnings elsewhere pay off.

NOTE 鈥 The comparisons made in the text are against figures from the previous set of results, which may 鈥 due to the timing of Company鈥檚 House filings 鈥 be different to those used in last year鈥檚 Top 100. Rankings may also differ from a year ago as the previous year鈥檚 figures are restated to take into account the absence of Carillion and the inclusion of other companies.

Insolvencies are on the rise

Carillion is the most obvious absentee from the latest TCI Top 100 after going bust at the start of this year. But thousands of other construction companies have also gone under in the past 12 months.

According to data from the Insolvency Service, over the 12 months to Q2 2018 there were 2,764 insolvencies in the English and Welsh construction industries, which is a rise of 3% on the preceding 12 months.

Chris Radford, local chair at R3, the Association of Business Recovery Professionals, says: 鈥淭he Carillion effect goes beyond unpaid contractors. Carillion鈥檚 failure has affected the decision-making process at banks and credit insurers and suppliers are enforcing stricter credit terms.鈥

Construction remains the worst industry sector in the UK for companies being compulsorily liquidated.

Graham Bushby, head of financial consultancy RSM Restructuring Advisory says: 鈥淒espite a seemingly never-ending demand for new housing, not all is as rosy as it seems. Material prices have been increasing on the back of a weaker pound, and labour costs have also risen, in part due to Brexit.

鈥淢eanwhile, property prices in many areas appear to have started to flatten. This appears to be contributing to yet another increase in the level of failures in the sector.鈥

The number of companies forced into liquidation is also rising, with 632 companies compulsorily liquidated in the 12 months to Q2 2018 鈥 a rise of 3%.

Civil engineering companies appear to fare better than builders, with insolvencies virtually static, while the number of compulsory liquidations dropped 13% over the past 12 months. In contrast, specialist contractors are faring worst with a 7% rise in insolvencies and an 8% rise in compulsory liquidations.

Radford says: 鈥淎 lot of construction companies rely on other construction companies. Sub-contractors are reliant on main contractors. In a normal supplier-customer relationship, there鈥 s a bit more stability. In construction, the supply chain is a lot more fragile. If there鈥檚 disruption to the supply chain, construction is reactive and there鈥檚 a risk to that.鈥

The latest data from the Insolvency Service shows that the worst affected sub-sector amongst the specialist trades is building completion and finishes, where insolvencies have leapt 13% in the last year.

Profit warnings

More profit warnings are expected from construction companies in the second half of 2018.

In the first six months of this year 17% of companies in the FTSE Construction & Materials sector warned about lower than expected profits according to research from consultant Ernst & Young (EY).

EY, which recently launched a new 鈥榮tress index鈥, said: 鈥淚f decision-making stalls under the weight of rising uncertainty, we expect to see further stress in FTSE Support Services and FTSE Construction & Materials, where companies would also be vulnerable to delays in government contracts and tighter labour markets.

鈥淭his would keep鈥╬rofit warnings at relatively high levels throughout the鈥╰hird quarter.鈥

These problems began emerging back in late 2016, when EY warned of the 鈥榗alm before the storm鈥 after identifying the largest amount of profit warnings for two years amongst FTSE construction companies.

鈥淭he construction sector is vulnerable to rising costs and falling confidence, so it鈥檚 no wonder that it now finds itself in the spotlight,鈥 cautioned EY at the time.

That spotlight has not shifted.

Quoted companies are obliged to inform the stock exchange if profits are expected to fall. Carillion warned on profits twice before collapsing. Interserve has also issued profit warnings and in Q2 2017 EY highlighted 鈥渃ontract issues鈥 in the FTSE Construction & Materials sector.

鈥淩isk has largely been transferred to contractors and more trying industry conditions are exposing problem contracts,鈥 warned EY.

In the third quarter of 2017, EY noted a divergence between profit warnings from companies exposed to domestic pressures and those benefitting from growth in overseas markets.

鈥淚ndustrial sectors would seem to be the greatest beneficiary, not just from the currency impact of Brexit but also a steadier oil price,鈥 said EY. 鈥淭he clear outliers amongst industrials are FTSE Support Services and FTSE Construction & Materials, two sectors that we鈥檝e highlighted previously as having significant domestic contract and pricing pressures.鈥

This article was first published in the September聽2018 issue of 海角社区app magazine, which you can read for free

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