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City site - Growth prospects will defy downturn


THE INTERIM results season started this week with contractors anxious to reassure a nervous City about their prospects.

Share prices in the sector have fallen by 20-30 per cent from their peaks earlier this summer as investors have become concerned about the absence of progress on PFI and the impact of a slowing economy. With British manufacturing now in recession and recent construction orders poor, confidence has suffered.

But most of the interim results will be good and contractors will make a vigorous argument that they can keep earnings growing through an economic slowdown.

Amec, for which analysts forecast a 20 per cent rise in first-half pre-tax profits to £39 million, is among the leaders.

The City will particularly want to see evidence of continuing growth in long-term and service contracts. At the start of this year, the major quoted contractors, such as Amec, Balfour and Carillion, boasted order books equivalent to 14-15 months' turnover and the growth of negotiated work, reduced over-capacity and more service-related work should all have helped margins.

According to broker Schroder Salomon Smith Barney, margins from traditional contracting may not improve much beyond the 2.53 per cent range, but group margins among the majors will move towards an average of 3.8 per cent, helped by growing service revenues.

The 20p rise in Morgan Sindall's share price to 483p when it unveiled sparkling results earlier this week suggests the City is still sympathetic towards construction groups which have a coherent story. Morgan's margins on its staple construction business remain an unspectacular 1.2 per cent.

But the group's recent acquisition of Carillion Housing has made it the largest provider of affordable housing and its purchase of Miller Civil Engineering has given it a strong foothold in the water, tunnelling and civils market. Both these areas should show resilience in the tougher times ahead.