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Profits decline but lower-ranked CN100 firms make strong showing

Average pre-tax profits and profit margins fell across the top 100 contractors but many of the firms showing the strongest pre-tax profit margins are among the lowest ranked by turnover.

Companies ranked in the lowest quarter of the CN100 league table by turnover are among those with the 25 highest pre-tax profit margins - including this year’s 100th-placed firm.

Across the UK’s top 100 contractors, 42 recorded pre-tax profit margins (calculated on pre-tax profits before exceptional items) of less than 2 per cent, while the margin for 19 of the firms hit more than 5 per cent.

The average pre-tax profit margin across the top 100 was 2.5 per cent, a drop from the 3 per cent recorded in their previous financial years, while the total value of pre-tax profit across the UK’s top 100 contractors in the UK slid by 1.2 per cent.

Shrinking margins are perhaps not surprising given the current economic climate.

Increasingly, top contractors are bidding for smaller-value projects than they may have done previously, as the larger-value projects become more scarce and bid lists get longer and more competitive.

Davis Langdon head of offices sector for Europe Iain Parker says the consultancy is seeing project proposals from contractors with margins of between zero and 2 per cent.

“When you go into the detail around the rates, it can’t be done - it smacks of people that are desperate for work,” Mr Parker says. “There is a fear that we will see contractors go bust because they’ve ‘bought turnover’.

“The bigger fish are swimming in smaller ponds - we’ve been seeing that for a while.”

Larger contractors are also able to diversify. “They’re already in sectors where they’re getting good returns and can invest in sectors where things are tight,” Mr Parker says.

Marginal strength

Almost half (47) of the CN100 reported a fall in pre-tax profit according to their latest sets of accounts, with 31 of these seeing a drop of more than 10 per cent.

Six companies moved into a pre-tax loss, including Morrison Facilities Services, North Midland Construction and Headcrown Group, while McNicholas Construction and re-entrant Clugston swung back from a loss into pre-tax profit.

The top quarter of firms saw a marginal drop in overall pre-tax profit of 0.6 per cent, while pre-tax profit among the bottom 25 grew by more than 28 per cent.

Of the top 25 firms in the CN100, just six were in the top quarter for pre-tax profit margins, including Bowmer and Kirkland, May Gurney and Shepherd, with margins across the top 25 of between 0.8 and 7.7 per cent.

Carillion and Mitie are two top 10 contractors that are among those reporting stronger margins - of more than 5 per cent - with both companies placing an emphasis on support services and facilities management, though figures do not account for exceptional items.

It is in fact the bottom 25 firms where we see the highest number of those ranked in the top quarter for pre-tax profit margins, including Rydon Group, at 100 in this year’s table, along with new entry Dawnus and re-entry Michael J Lonsdale.

This tier is also the only one where the average pre-tax profit margin has grown over the latest financial years, up to 2.7 per cent from 2.2 per cent.

Homeserve - the 29th firm in the overall CN100 table ranked by underlying turnover - showed the strongest pre-tax profit margin across all the top firms, before taking into account exceptional items, including its acquisition of the remaining 51 per cent of equity interest in Domeo and £24.2m of one-off charges partly due to changes in its sales, marketing and customer complaints functions.

Cape Industrial Services, the top CN100 scaffolding specialist contractor, is also among the top five companies ranked by profit margins following a second successive year of profit growth, having come back into the black in the year to December 2010.

Of those firms posting a positive profit margin (eight posted a pre-tax loss this year) Ardmore recorded the lowest - at 0.2 per cent. Others recording margins of less than 1 per cent include re-entrant Barhale and ISG.

But the top 10 firms retain the lion’s share of pre-tax profit, accounting for 50 per cent earned in the latest financial years.

Those companies ranked between 21 to 30 in the main CN100 league table had a notably larger proportion of pre-tax profit - 14 per cent - than they did turnover - 9.9 per cent.

Mr Parker points out that the struggles facing the industry are far from over, with contractors that are able to diversify being the ones that are likely to see the stronger returns.

This is evident in examples such as Dawnus, which has seen a meteoric rise in turnover and pre-tax profit (and one of the strongest margins among the top 100) as a result of the growth in business both in the UK and Africa.

“The middle-tier contractors operating in one country are going to struggle,” Mr Parker says.

Click on diagram to enlarge

Top 10 pretax profit margins

Read more from the CN100

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