Kier will not chase large increases in its housebuilding volumes as outgoing chief executive Paul Sheffield doesn’t want the business “exposed to the next housing slump”.
Mr Sheffield, who last week announced he would stand down in June, insisted he had no regrets about the contractor’s decision not to pursue large housebuilding volumes, in a week in which housebuilders recorded record profits.
“To be frank, I don’t want the business exposed to the next housing slump when it comes, and it will,” he said.
“There’s also a strong desire not to be classified in too many different sectors of the market; we want to be streamlined.
“We strategically chose not to invest in housebuilding over the last few years. The reason [other housebuilders] are doing well today is they invested four years ago.
“If we suddenly changed tack and decided to invest it would be at least three years before you see it coming through.”
Shorter payment terms:
Kier’s incoming chief executive Haydn Mursell, speaking to Construction News after the contractor posted interim half-year results, said he expected Kier to take a £40m cash hit over the 2013/14 financial year as subcontractors on building jobs seek 30-day payment terms on contracts.
Mr Mursell said: “The supply chain are in a position where they have been suppressed and want better terms, and we are seeing that coming through in the public sector and on frameworks where 30-day terms, or similar, are becoming the norm.”
He added that the industry was “entering a phase where there is a culture of just having explicit shorter terms within contracts… the days of the past of 45 or 60-day terms are becoming less frequent”.
Mr Sheffield was speaking to Construction News after the contractor announced interim results for the six months to 31 December 2013.
The group’s turnover in the half-year was £1.4bn, up from £976m for the same period in 2012 – a rise of 47 per cent following the purchase of May Gurney in July last year.
“I don’t want the business exposed to the next housing slump when it comes, and it will”
Paul Sheffield, Kier chief executive
Operating profit before exceptional items was £44.4m, up 96 per cent on 2012, while pre-tax profit grew 90 per cent to £36.8m.
Its property division, which includes Kier Homes, saw turnover fall 19 per cent to £55m but operating profit was up 56 per cent to £11.1m.
Mr Sheffield said: “I have no regrets at all. Housebuilding is very different to construction, it’s a different mentality, a speculative sector.
“If you look at what we’re doing in property, the whole focus is [on] avoiding the speculative risk.
“We won’t build much at all without having an end-user and an exit route at the start. In housebuilding you have to be quite confident the market will be there five years down the road.”
Kier’s development arm has sold a cash and carry warehouse on one of its sites in west London for £41m to discount retailer Costco.
The 140,0000 sq warehouse is the final phase of the scheme on the old Western International Market site in Hayes, Middlesex and will be complete in the summer.
Group finance director and incoming chief executive Haydn Mursell said: “Many [Kier Property schemes] are mixed-use; if it’s resi or commercial or retail we’ll always seek to have a pre-let.
“Costco is fundamentally a warehouse – that pre-let was all signed up before we committed to any land or building contract; that’s the way we manage the risk.”
Kier Property began the project in 2008 by relocating the businesses on the site to a new site nearby.
The old Western International Market site includes the Costco scheme, Kier’s “Trade City” scheme, and a data centre for Virtus.
Kier developed “Trade City” with clients of DTZ Investment Management which has nine units to let ranging from 4,500sq ft to 28,000sq ft. Kier sold the other part of the site to Virtus, which is currently building a 180,000sq ft data centre.
Kier said it had acquired more than £1.5bn in new work during the six-month period, with 100 per cent of forecast revenue for construction secured.
The firm posted a 2.3 per cent operating margin for its construction business and a 4.3 per cent margin for services. Its net debt was £138m.
“We have walked away from quite a number of contracts where customers have insisted on uncapped liabilities on projects; it’s something we will not do”
Paul Sheffield, Kier
Asked whether client terms and conditions were easing, Mr Sheffield said: “Thank goodness, yes. I think clients have been advised by legal and commercial advisers over the last few years to try their arm at pushing risk down the supply chain.
“Inevitably as soon as we and our competitors start getting busier, people are pushing back on terms and conditions.
“Customers who have been perhaps aggressive over the last few years have less chance of making those terms stick.”
He said Kier had walked away from schemes where clients have demanded uncapped liabilities, and hinted things were worse in the private sector, as a lot of its public sector work was in frameworks with “serial procurers”.
“We have walked away from quite a number of contracts where customers have insisted on uncapped liabilities on projects; it’s something we will not do,” Mr Sheffield said.
“The daft thing is [that] sometimes customers are represented by someone with a real tick-box mentality and would rather place a contract with a small company with unlimited liability than with a robust company who insists on having a cap.
“The reality is that if a small company has a problem on a job, an uncapped liability means nothing because they just go pop. You end up with some pretty ludicrous positions; we have walked away because we won’t accept that.”