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Hoarding cash as dividends slashed: Contractors brace for a storm

This year’s CN100 reveals that businesses are taking substantial measures regarding their balance sheets amid an uncertain outlook.

A shift has taken place in the industry’s attitude towards cash in the past 12 months.

Bosses from across the market have been queuing up to tell CN about being satisfied with declining revenue in 2018, and now the CN100 has revealed a pattern of firms hoarding cash and cutting shareholder payouts.

According to CN’s analysis of their most recent accounts, the UK’s 100 largest contractors have increased their collective cash pile by £1.42bn compared with their previous results, with the top 10 firms boosting their reserves to the tune of £864.4m.

This was accompanied by dividends across the CN100 firms being slashed by a quarter (26 per cent) from £567.1m in their previous accounts to £420.9m in their latest.

“Revenue isn’t a driver; it’s about profitability and cash,” Bam Construct’s chief executive James Wimpenny told CN earlier this year. “Some fall foul of getting too big and it all collapsing. Why do we need to keep growing?”

This emphasis on quality over quantity was echoed by Balfour Beatty chief executive Leo Quinn, who told CN at the company’s recent half-year results that “cash doesn’t lie”.

“We declined 9 per cent in revenue in our last set of results and margins increased,” he said.

CN100: CASH AND DEBT

CN100 2018 rank (by turnover)ContractorCash and equivalents – latestCash and equivalents – previousTotal borrowing (£m) – latest Total borrowing (£m)  – previousLatest accounts end-date
1 Balfour Beatty 968.0 769.0 938.0 829.0 31/12/2017
2 Kier 499.8 186.7 631.8 303.2 30/06/2017
3 Interserve 155.1 113.3 654.3 460.5 31/12/2107
4 Laing O’Rourke 324.0 271.0 266.7 225.6 31/03/2017
5 Morgan Sindall 221.2 228.5 27.8 19.8 31/12/2017
6 Galliford Try 765.8 599.8 758.6 608.5 30/06/2017
7 Amey 215.9 173.3 458.7 639.5 31/12/2017
8 Mace 195.8 116.6 161.5 4.9 31/12/2017
9 Skanska UK 293.7 299.6 8.8 24.8 31/12/2017
10 ISG 75.7 92.8 11.8 32.0 31/12/2017
11 Costain 248.7 210.2 71.0 70.0 31/12/2017
12 Wates 169.5 191.6 20.8 32.9 31/12/2017
13 Bouygues UK 327.7 191.1 48.0 0.0 2016-2017
14 Willmott Dixon 82.8 81.2 0.0 72.1 31/12/2017
15 Multiplex 61.2 63.1 0.0 0.0 31/12/2017
16 Bam Construct 82.3 116.6 0.0 0.0 31/12/2017
17 Sir Robert McAlpine 205.9 224.1 184.5 187.2 31/10/2017
18 Bowmer and Kirkland 315.5 267.7 40.6 41.4 31/08/2017
19 Vinci 210.3 62.6 22.0 0.0 31/12/2017
20 VolkerWessels UK 128.4 69.6 1.3 2.9 31/12/2017
21 Graham 70.1 66.6 5.6 6.0 31/03/2018
22 Robertson 141.5 115.3 0.0 0.0 31/03/2018
23 Murphy Group 61.9 96.9 - 0.0 31/12/2017
24 Bam Nuttall 108.8 120.3 0.0 0.0 31/12/2017
25 Engie Regeneration 18.5 13.8 0.0 0.0 30/09/2017
26 Morrison Utility Services 21.5 68.0 0.0 0.0 31/03/2017
27 Lendlease 60.2 69.0 0.0 0.1 30/06/2017
28 McLaren 54.1 47.4 0.0 0.0 31/07/2017
29 Renew 7.0 14.1 3.1 9.3 30/09/2017
30 Carey Group 20.2 10.2 18.6 13.4 31/03/2017
31 Eurovia Group 75.1 86.0 15.3 20.8 31/12/2017
32 NG Bailey 14.5 11.0 0.0 0.0 02/03/2018
33 Winvic 53.5 47.2 0.0 0.0 31/01/2017
34 Buckingham Group 64.4 62.6 0.0 0.0 31/12/2017
35 Keltbray 50.0 38.6 0.0 0.0 31/10/2017
36 Hill Partnerships 75.5 73.2 88.1 56.3 31/12/2017
37 JRL Group 30.9 32.7 37.6 27.6 31/12/2017
38 Northstone (NI) 4.8 5.3 0.0 0.0 31/12/2016
39 Ardmore 96.6 50.0 1.1 3.5 30/09/2017
40 Imtech 29.3 19.9 30.5 29.9 31/12/2017
41 Osborne 22.1 26.7 2.0 0.0 31/03/2017
42 McAleer & Rushe 47.4 45.3 0.0 0.0 31/12/2017
43 SSE Contracting 0.1 0.5 0.0 0.0 31/03/2017
44 Byrne Group 22.3 41.8 16.3 17.9 31/05/2017
45 T Clarke 16.7 12.3 5.0 3.0 31/12/2017
46 Watkin Jones 65.3 47.2 24.3 15.0 30/09/2017
47 Lakehouse 26.1 0.0 27.1 20.7 30/09/2017
48 North Midland Construction 17.0 11.4 0.0 0.0 31/12/2017
49 Higgins Group 34.4 31.4 49.7 25.8 31/07/2017
50 RG Carter 77.7 68.6 0.0 0.0 31/12/2016
51 Severfield 33.1 32.9 0.0 0.0 31/03/2018
52 Clancy 3.5 4.3 16.3 12.6 31/03/2017
53 Ogilvie 15.4 0.0 0.0 2.8 30/06/2017
54 Cape Industrial Services 16.2 24.3 0.0 0.0 31/12/2016
55 McLaughlin & Harvey 30.3 35.7 0.3 0.6 31/12/2017
56 Midas Group 26.8 26.7 0.0 0.0 30/04/2018
57 Spie 49.8 39.8 0.0 0.0 31/12/2016
58 FM Conway 15.2 7.7 75.0 17.2 31/03/2017
59 McNicholas Construction - - 9.1 8.7 30/06/2017
60 United Living Group 20.6 7.2 0.0 0.0 31/03/2018
61 John Sisk & Son 12.7 17.8 0.0 0.0 31/12/2016
62 Esh 25.7 29.1 19.0 13.7 31/12/2016
63 MV Kelly 11.2 11.4 0.0 0.0 31/05/2017
64 Rydon Group 36.8 27.2 0.0 0.0 30/09/2017
65 City Building (Glasgow) 6.9 4.2 0.0 0.0 31/03/2017
66 William Hare 15.2 0.0 0.0 0.0 31/12/2016
67 Michael J Lonsdale 42.2 32.1 0.0 0.0 30/09/2017
68 Morrisroe Group 68.2 33.3 0.0 0.0 31/10/2017
69 Seddon 18.6 22.0 0.4 1.9 31/12/2017
70 Forth Holdings 17.3 9.2 11.9 11.9 31/08/2017
71 Bechtel 0.1 0.1 0.0 0.0 31/12/2017
72 Eric Wright Group 14.8 19.8 58.0 43.9 31/12/2016
73 Cruden Holdings 42.0 26.8 1.0 5.3 31/03/2017
74 Dawnus Group 7.2 10.3 7.3 7.5 31/12/2016
75 Briggs & Forrester 32.5 28.8 2.5 5.1 31/10/2017
76 Tolent 18.4 23.7 2.2 3.1 31/12/2017
77 Clugston 30.0 18.1 0.0 0.0 31/01/2018
78 Babcock Rail 12.4 24.2 5.7 5.7 31/03/2018
79 SDC 14.9 14.5 0.0 0.0 30/09/2017
80 One Group Construction 32.3 28.3 2.9 0.6 31/12/2017
81 Hochtief UK 6.0 10.6 0.0 0.0 31/12/2016
82 Alun Griffiths 12.4 5.5 1.4 1.5 31/12/2016
83 Erith 9.5 11.2 9.8 0.0 30/09/2017
84 Lindum 22.1 21.4 0.0 0.0 30/11/2017
85 Novus 4.6 7.1 0.0 0.0 31/12/2017
86 Gilbert Ash 17.9 15.0 0.0 0.0 31/12/2016
87 RGCM 7.5 5.4 0.0 0.0 31/12/2016
88 Caddick Group 33.5 28.1 8.8 9.4 31/08/2017
89 Gratte Brothers 9.1 0.8 0.0 0.0 31/12/2017
90 Dodd Group 24.4 20.7 0.0 0.0 31/03/2017
91 E W Beard 24.0 19.5 0.0 0.0 31/12/2017
92 Shaylor Group 14.7 11.9 0.0 0.7 30/09/2017
93 Durkan Holdings 35.4 13.0 7.1 14.2 30/11/2017
94 Lorne Stewart 9.2 10.1 0.0 0.0 31/12/2017
95 Actavo 0.8 5.3 15.5 12.6 31/12/2016
96 GF Tomlinson 8.7 9.7 0.0 0.0 31/12/2017
97 Mulalley & Company 4.2 4.5 0.0 0.0 31/03/2018
98 Wood Group 21.3 41.4 0.0 0.0 31/12/2016
99 R J McLeod 41.1 42.9 0.0 0.0 29/10/2017
100 CJ O’Shea 23.3 9.3 0.0 2.2 31/03/2017

The CN100’s largest firm increased dividends by £6m – one of only 33 firms to post such an increase in their most recent results, with almost as many (29) choosing to reduce shareholder payouts and more than a third remaining flat.

Only Kier (£313m) increased its cash reserves by more than Balfour (£199m), though its total cash pile was still around half – £499m – the size of Balfour’s £968m, which is the highest on the list.

This was achieved against a backdrop of flat revenue for Balfour Beatty, as Mr Quinn was pleased to reveal, but the UK’s largest firm was nevertheless in the minority in reducing turnover.

“Firms are having to commit to prices and there is no way of knowing what the labour market and materials market will be like post-March”

Will Waller, Arcadis

Three-quarters (72) of this year’s CN100 firms increased their revenue in their latest full-years, which took the top 100 total to £65.42bn.

Given the high-profile losses posted by several major tier ones in the past year, it’s little surprise that CEOs are keen to present their business as profit driven rather than revenue focused.

The cash trends uncovered by the CN100 also indicate firms are moving to protect themselves ahead of potential economic turmoil as the final Brexit deal looms.

While the majority of the accounts that make up this year’s CN100 cover periods prior to Carillion’s collapse, they still come after several years of profit warnings among many big players against the backdrop of political and economic uncertainty since the EU referendum.

The catastrophic failure of Carillion at the start of the year, however, laid bare the dangers of poorly managed balance sheets. The contractor was heavily criticised for increasing dividend payments despite a decline in cashflow – not least in the parliamentary report into its demise, which labelled it “a story of recklessness, hubris and greed”.

NG Bailey chief executive David Hurcomb believes the failure of Carillion was a watershed moment in demonstrating that no firm was too big to fail, no matter how large the pipeline of revenue. “I think the fallout from Carillion has rippled through,” he says. “What we’ve seen is those that were perceived as being too big to fail have failed.”

A Brexit cost crisis

The UK’s looming departure from the EU provides several reasons for an increased focus on cash management.

Not only could there be an economic downturn as a result of Brexit, the possibility of new or increased tariffs could have a major impact on labour and material costs.

Arcadis UK director Will Waller believes this is a factor weighing on the minds of companies signing up to contracts ahead of the final deal – or lack thereof.

CN100 2018 total cash graphic

CN100 2018 total cash graphic

“Firms are having to commit to prices and there is no way of knowing what the labour market and materials market will be like post-March,” he says. “We talk about 5-6 per cent inflation on materials; a certain kind of Brexit deal might push sterling down by a further 10 per cent and that could result in a further 4 to 5 per cent materials cost inflation. Suddenly the job price [and] the material price are completely different.”

The risk of cost increases is such that some contractors are pushing the inclusion of Brexit clauses that allow them to exit problematic contracts.

Clyde & Co partner David Hansom, a lawyer who specialises in procurement, is already writing these terms into his clients’ agreements. “If Brexit does have an impact on exchange rates and if tariffs do come in and the contract becomes undeliverable, then the contractor has the option to partially terminate the contract or has the option to seek compensation,” he explains. “If [there are] no clauses, [it] could be problematic for contractors.”

A risky business

As well as seeking terms that protect against Brexit-related risks, contractors have been keen to stress the virtues of walking away from deals they believe are undeliverable.

Balfour’s Mr Quinn tells CN the company has been bullish in refusing to bid for risky jobs, adding that the firm is avoiding working with rivals it does not believe to be financially sound. 

“We’re walking away from contracts with onerous terms and conditions like consequential loss and uncapped damages, liquidated damages that are greater than the profit on the contract,” he says. “We’re not prepared to take joint and several liability with another construction company whose balance sheet we don’t have faith in.”

Bam’s Mr Wimpenny is another leader who has recently argued that reducing revenue expectations will result in a less risk being taken on by the business.

“We’re walking away from contracts with onerous terms and conditions like consequential loss and uncapped damages, liquidated damages that are greater than the profit on the contract”

Leo Quinn, Balfour Beatty

“Our order book is the best it’s been for a long number of years in terms of not having problem projects,” he told CN earlier this year. “We need to watch that though and that’s why revenue isn’t a driver for me. Our industry is very good at saying yes, we can do anything, but you have to realise your limitations and say sometimes that it’s best to walk away.”

Arcadis’ Mr Waller believes the shift in attitudes is occurring across the board. “There is a more proactive strategy from a lot of contractors and [the] supply chain around not chasing turnover – bidding for quantity over quality,” he says.

“There is evidence that that is working – it has worked for Kier, Balfour Beatty and Costain, there are probably second tiers that have [also] taken that approach. In general the attitude to risk has hardened [across] the supply chain. This is partly due to Brexit risk, but also things like Carillion, which has reinforced the need to get the right price for a job.”

Client scrutiny

The issue of lowest-cost procurement came to national attention following the Grenfell Tower fire.

Since then the collapse of Carillion left two major hospitals half-built for nearly six months, with little progress on replacements amid concerns that the failed contractor had taken on contract terms that simply could not be delivered.

The plight of the Royal Liverpool and Midland Metropolitan projects has prompted renewed calls for a client-led approach to procurement that focuses on value, with the government in particular called on to enact change.

KPMG associate director of its infrastructure advisory Emma-Jane Houghton says a number of clients have shown a willingness to transform their approach. 

dividend payments

dividend payments

“We are seeing much more appetite from clients to challenge the traditional model and think about value,” she said. This, she tells CN, has resulted in some clients contracting directly with tier two operators and multi-party joint ventures.

However, David Hansom of Clyde & Co warns that a significant shift in procurement is still some way off – and may in fact be counterproductive.

“You can’t just turn that oil tanker overnight; if public bodies go too far the other way and start turning the screws and over-compensate on these issues, you might find contractors simply not prequalifying,” he says. “For example, when the liquidity ratios or the debt-to-equity ratios seem high – and those are pass-fail tests in a procurement process – you often do find that no one makes the grade.”

The market also remains highly competitive, and while some contractors may be willing to walk away from work, others are still likely to take it on whatever terms the client is seeking, as NG Bailey’s Mr Hurcomb points out.

“There are still a large number of tier one contractors,” he says. “It’s very, very competitive and I think some of those tier ones have been chasing revenue rather than perhaps keeping lean and focusing on risk management and the bottom line.”

Time will tell whether contractors’ efforts to mitigate any potential downturn by increasing their cash reserves prove wise, but learning lessons from Carillion’s capitulation will undoubtedly help. 

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