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North Midland profit dragged down by legacy contract

North Midland has published its results for 2017 showing growth was hampered by a £7.3m impairment on a legacy contract.

Underlying profit at North Midland increased to £8.3m for the year ending 31 December 2017, up from £5.9m in 2016.

Revenue for the year grew to £291.8m, up 16 per cent from £250.5m the previous year.

However, the company was left with a £7.3m impairment charge after it lost a High Court ruling to Cyden Homes towards the end of last year relating to a contract completed in 2016.

This charge reduced its reported pre-tax profit to £1m.

The company will challenge the ruling in the Court of Appeal in July.

Chief executive John Homer told Construction News he was pleased with the firm’s overall 2017 results, and pointed to improved payment terms for its supply chain.

“We’ve reduced our supplier payment days to 43,” he said. “So we’ve gone from 60 days in 2015, 52 days in 2016, down to 43 days last year.”

Mr Homer also singled out North Midland’s cash position in its latest accounts.

“Our focus on cash is really quite important – £22m in the bank today,” he said.

North Midland plans to use the cash to increase long-term shareholder value by investing in project finance and its four offsite facilities, which produce packaged assets for the water industry.

“We’re doing a lot investment in that area,” Mr Homer added.

Work in the water industry remained North Midland’s biggest income stream in 2017, contributing more than 50 per cent of its underlying revenue at £168m.

More than £100m of this came from one client, Severn Trent, but Mr Homer said he hoped to win more work with other clients in the upcoming AMP7 five-year spending review.

North Midland’s fastest growing businesses in 2017 were its construction and highways divisions.

Operating profit for the construction arm jumped 49 per cent from £1m to £1.5m in 2017 on revenue of £33m, with work in the student accommodation sector accounting for much of this growth.

“I’ve been building student accommodation for the last 20 years and I’m always thinking, ‘It’s going to stop now’, but it always continues,” he said.

Mr Homer said North Midland’s capabilities in the student accommodation sector had allowed it to diversify into the private rental and sale sectors.

North Midland expects turnover for the construction arm to hit £40m in 2018.

The highways division has become increasingly significant for the business, with revenue up 38 per cent in 2017 to £45.1m, with an expectation it will grow further in the coming years.

“There are massive spend profiles there,” Mr Homer said.

The group’s power and telecoms businesses both struggled in 2017, however, with the former seeing revenue halve to £15m, while the telecoms business reported an operating loss of £518,000, having suffered a £1.5m loss the previous year.

Mr Homer said the working requirements for its power business were “very sophisticated” and that the firm wasn’t planning to “push it that hard” to achieve growth.

North Midland expressed confidence that it would hit £300m turnover and 3 per cent underlying margin in 2018.

“The feeling in the market is that demand is outstripping the supply,” Mr Homer said. “We’re turning work away every week.”

North Midland’s longer-term target is to achieve £500m turnover with a 5 per cent underlying margin by 2022.

Mr Homer said: “To get to 5 per cent we’ve got to think differently.

“I think there’s a mindset in the industry that accepts the status quo rather than saying, ‘We deserve more because of what we put in and the expertise and the risk we take’.”

He suggested high demand could help firms “push back” against clients and increase margins.

There was no mention of Carillion in North Midland’s accounts, despite the firm working for the collapsed contractor on a contract with Telent.

Mr Homer said: “The way that deal was structured meant Telent stepped in and we continued to work with Telent successfully, so there’s been no effect there.”

He confirmed that North Midland had taken on around a dozen former Carillion staff across its business since the contractor’s collapse in January.

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