The average pre-tax margin for the 10 largest UK contractors has fallen to -0.9 per cent, exclusive research carried out by CN reveals today, as evidence emerges of firms tightening their belts ahead of Brexit.
Average top-10 margins have now declined for the fifth successive year, down from an average of -0.5 per cent recorded in last year’s CN100.
It comes in spite of the value of construction output increasing for the fifth year in a row in 2017, according to the Office for National Statistics.
The CN100 analyses the most recent full-year financial accounts for the 100 biggest UK contractors by turnover.
Among the 10 largest firms, £501m of combined losses at Interserve, Amey and Laing O’Rourke, combined with lower profits elsewhere, dragged down average margins.
Carillion, which does not feature in the 2018 rankings having collapsed in January, had been second by turnover and reported the largest pre-tax profit in last year’s CN100.
However, Carillion went on to report a £1.15bn half-year pre-tax loss in September 2017. This loss was bigger than all the full-year profit made by 2017’s CN100 firms (£1.12bn), and also greater than the combined profit reported by the 10 largest firms for the last three CN100s combined (also £1.12bn).
In light of Carillion’s collapse, new measures have been introduced into this year’s CN100 to look at firms’ short and long-term sustainability.
Our analysis found that total debt for the top 10 contractors rocketed to £3.92bn as per their most recent accounts, up 24 per cent compared with their previous financial years.
Five of the top 10 increased their borrowing by £100m or more in their latest full-years, with Kier reporting the largest increase – £328.6m – that took its total debt to £631.8m.
Interserve reported the biggest increase in leverage (total borrowing as a percentage of total assets), with its £654.3m of borrowing increasing its leverage from 24.9 per cent to 38.1 per cent.
Debt among construction companies is overwhelmingly concentrated in the top 10, which accounts for 81 per cent of the £4.87bn of total borrowing across the CN100.
Our analysis revealed that firms were working in other areas to strengthen their balance sheets, with total cash reserves for the top 100 increasing to £7.94bn in their most recent accounts, up 23 per cent from £6.47bn in the previous financials.
At the same time, dividends have been slashed, with the top 100 paying out £420.9m compared with £567.1m in their previous years, which does not include the £82.7m Carillion paid out.
Rising cash and falling dividends suggested firms were bracing themselves for potential difficulties.
EY construction lead Ian Marson said the problems faced by the top 10 go back to the start of the decade.
“Around 2011/12, many firms needed to protect revenue and the size of their business,” he said. “As a result they took on work at lower margins with the expectation that the downturn would be a short one.
“I’ve talked to CEOs of three or four large construction firms over the last year, and each one of them has said, ‘What’s happened in the past is there’s been a downturn, we’ve had to invest for a period of time and we’ve taken low margins, and we always expected in two or three years [profitability] would come back’.
“This time it’s been six or seven years and it still hasn’t come back.”
NG Bailey chief executive David Hurcomb warned the industry was set for “pretty choppy waters over the next 12 months”.
Other bosses were more positive, however.
Balfour Beatty chief executive Leo Quinn said construction had been the group’s “nemesis” in recent years, but told CN it was now becoming “the jewel in the crown”, with margins for 2018 set to increase.
Mr Marson added: “They [contractors] are harvesting their resources to keep them in one place rather than deploying them. It’s a sensible measure and it suggests that maybe FDs are in control rather than CEOs.”
Companies outside the CN100 top 10 generally fared better over the past 12 months, with pre-tax margins for contractors ranked 11-100 by turnover averaging 2.3 per cent.
CN’s analysis found that large specialists with revenue in the £300m-£500m range outperformed the top 100 average, with more than half of the firms in this turnover band achieving a pre-tax margin of 4 per cent or above.
Read this year’s full CN100 ranking and analysis here.