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Laing O’Rourke: The problem on its balance sheet

David Price

Laing O’Rourke’s much-anticipated, long overdue results for the year to 31 March 2017 finally dropped this morning. We can now at last reset the Laing O’Rourke results countdown clock at Construction News towers.

As expected, the UK’s largest private contractor reported another pre-tax loss – £66.9m for FY 2017, an improvement on the eyewatering £245m loss in the previous year.

But the company also saw its cashflow turn positive, with £115m coming into its coffers compared with an outflow of £315m in FY 2016.

Overall you’d say the performance in FY 2017, while not necessarily good, is certainly less bad, and there’s a feeling Laing O’Rourke is turning a corner after a tough few years.

But this mainly focuses on income for the last year. A look at the firm’s balance sheet suggests there’s plenty more to do this year.

The main area of concern is around the company’s assets relative to liabilities.

As of FY 2013 for every £1 of assets it owned, the company had 74p of liabilities, which it managed to reduce to 69p by 2015. Pretty good compared with some other major contractors.

However, since FY 2016, when the Canada job and other issues started to really hit the balance sheet, that has climbed fairly rapidly to 82p worth of liabilities for every £1 of assets.

This change isn’t down to O’Rourke’s liabilities increasing, however – for all its troubles its debt has remained fairly steady over the years.

Instead, it’s the value of the firm’s assets that have fallen, from £2.38bn in FY 2013 to £1.74bn in its latest results.

This fall has mainly been driven by the depletion of cash and equivalents over the five years, most likely due to the need to cover losses, reducing its liquidity and its cushion against future problems.

Improving cashflow has been marked as one of Laing O’Rourke’s main performance measures for the current financial year, which will help it rebuild its balance sheet.

And this is what makes 2018 a crucial year for the company: better performance must start translating to a stronger balance sheet.

Laing O’Rourke needs to start seeing solid returns from its design for manufacturing and assembly operation (DfMA), which has sucked up cash in recent years.

The company claims the problems of DfMA’s first generation have been worked out and the new generation of structures is much improved.

O’Rourke will have a chance to prove this through its housebuilding partnership with Stanhope, which could be worth up to £2bn.

If it comes off, then the company could start seeing a very profitable revenue stream feed into its books.

And while its likely more losses will likely be booked on the Canada job in its next results, they are on course to reduce further in FY 2018.

On top of all this the company needs to keep delivering on high-quality jobs with decent margins in its main areas of the UK, Australia and UAE.

If the income improvements from these sources don’t start feeding into its balance sheet in FY 2018, then the future starts to look more challenging.

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