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Contractors File 2008: A rise before a fall?

Civil engineering turnover reached record levels in 2007. But there are ominous signs for the years ahead.

Civil engineering contractors generated turnover of 13.5bn in the last financial year, up around 1bn on the previous 12 months and a clear demonstration of the boom that has been echoing around construction for the last few years.

But major projects like High Speed 1 and Heathrow Terminal 5 have finished and so far Crossrail and the slow starting M25 widening and Thameslink projects have failed to generate replacement workload. Meanwhile, local government is tightening its belt; and there is the ever-ominous threat of the credit crunch. These factors could combine to make this year a real turning point in the state of the civil engineering market.

The signs are already there. Among the top 20 firms, civils turnover was static at 11bn in 2007. And, ominously, margins are tightening. On average, a top 20 firm made 12M in pretax profits last year, down 2M on the previous year. With turnover static, this translates directly to a cut of 0.1% in average margin to 3.2%.

There is now a real fear of a downturn, with order books looking far more shaky than in recent times. Overall, civils contractors’ work in hand is down from 24bn to 20bn, and virtually all of that plucked from the big-hitting, big-earning top 20 who see forward orders fall from 22bn last year to 18bn this.

Conrtactors’ predictions vary widely. Some foresee turnover falling by as much as 20% in the next two years while others expect their figures to at least double. The median figure across all firms is for a steady 10% growth, which, given the economic climate, is still pretty optimistic.
There is far more agreement over margins. They are going to get tighter. Most contractors foresee margins of 3% becoming the norm, with a few optimistic souls talking up margins in excess of 20% pushing the median figure to 5%.

Predictably, London and the south east is where most contractors are operating, with 60% of all firms active in London and 50% in the south east. Away from the overheated south east, 51% are active in the West Midlands, 49% in the East Midlands, 44% in the south and 42% in the north west.
And as for what they are doing, roads remain the biggest employer of resource, with 89% of firms turning over just over 2bn in that sector last year.

Eighty per cent were working in the 1.5bn buildings sector and 66% were in the 1.9bn water and wastewater sector. Fifty one per cent of civils contractors were in power and energy which generated 1.1bn but only 48% cited rail as a sector in which they were working, no doubt a reflection on Network Rail’s heavily tied frameworks. Workload in that sector was just over 1bn.
Going forward, contractors are increasingly looking to new or long-dormant markets, with waste now seen as the sector with the most opportunity. It is an area in which the government, via local authorities, simply has to invest to avoid massive European Union fines in the not-too-distant future. Almost half of all firms cite it as a growth area. This is a significant move on 2006 where waste was firmly behind the road, rail, buildings, water and energy sectors, which have traditionally dominated civils workload.

Prospects for work in the energy sector also look strong, boosted by the government’s frequent announcements on new nuclear build, commitments to renewable energies and long-term commitments to Britain’s nuclear decommissioning legacy a sign of guaranteed sources of income for years to come.

The road and rail sectors have slipped behind waste and energy as markets where prospects are strongest, with rail slightly more fancied than last year. Optimism about rail perhaps reflects Network Rail’s next five year 30bn investment plan and its commitment (verbally at least) to several major projects. In comparison, the Highways Agency’s annually negotiated settlements with the Treasury and new-found love of hard shoulder widening as a substitute for traditional widening perhaps explains fading hopes for this sector.
Another sector where government has been vocal on the need for action after years of minimal investment is coastal and flood defences. This has emerged as fifth favourite, with 24% of contractors optimistic about prospects compared with a meagre 5% last year.

Which means the big turn-offs are water, now entering the traditional five-year spending cycle dip, building which is suffering the immediate effects of the credit crunch and geotechnical, always at the vanguard of any economic downturn.

Indeed it is sobering to note how confidence in specialist geotechnical has collapsed with just 6% of contractors identifying it as a growth area.

Top 20

The top 20 firms dominated the market last year. Of the 13.3bn workload, 82% of it went to the top 20. Indeed, 50% of it went to the top five. More astonishingly almost a third of it, 4.1bn or 31%, went to the top two – Balfour Beatty and Laing O’Rourke.

These two heavyweights are now streets ahead of their nearest rival, Galliford Try. Both had fabulous years, notching up growth of 22% and 46% respectively. The two also boast forward order books worth an incredible 8.7bn, representing well over 40% of all the work out there. Clearly, the big are just getting bigger.

Galliford Try, now with recent acquisition Morrison Construction firmly embedded, had a pretty decent year too, with turnover up 23%, profit up 29% and margins up from 1.8% to 2.7%. This, coupled with a relatively disappointing set of results from its nearest challengers, gives it third place.

With the UK looking set for a decline, how long will it be before others look to follow the overseas lead?
And what of the challengers? A sharp drop in civils turnover sees Skanska UK plunge from third in last year’s rankings to eighth this. Carillion and Nuttall are simply treading water in fourth and fifth. The big upward movers are instead Morgan Est and J Murphy & Sons, surging from 13th to 6th and from 14th to ninth respectively.

The acquisition of Amec’s DPS business in July 2007 will have aided Morgan Est’s surge in turnover from 324M to 575M, but a doubling in profits – albeit still at low margin – is never to be sniffed at. Murphy’s margin of 7.9%, meanwhile, is a matter of some intrigue.

Other big movers outside the top 10 are Sir Robert McAlpine, Kier Group, Clancy Docwra and Black & Veatch.

International

Few UK contractors venture overseas, but for those who do, namely Balfour Beatty and Laing O’Rourke, there is clearly money to be made.
A total of 2.8bn in turnover was generated overseas by UK civils contractors last year, and overseas order books were a hearty 6.1bn. And yes, 2.7bn and 3.3bn of that sits with Balfour Beatty and Laing O’Rourke.

Balfour Beatty is clear champion with its overseas civils turnover of 2.1bn almost matching its UK operations – a pretty impressive feat. Laing O’Rourke has some way to go before its 608M turnover matches that of its UK empire, but with an order book of 3.3bn it may not be long.
Roads and buildings – especially in the Middle East – are generating most of the work with rail also contributing significantly.

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