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City Site - Pressure mounts on industry profits

FINANCE

IT IS HARDLY surprising that the number of profit warnings issued by construction and building materials companies rocketed from just one in the second quarter of this year to 10 in the third quarter.

The figures, gathered by Ernst & Young, which were the worst for the sector in over four years, highlight the steady toll which weakening housing and consumer markets are taking on the industry's profits.

Over two-thirds of the warners are house builders; indeed, it has been an achievement for any house builder to have avoided warning on prof its. Most of the rest were suppliers to the DIY and repairs sector and warnings from the related household, goods and textiles sector leapt from one to six.

Ernst & Young blames the surge in warnings on weak economic growth and low consumer confidence and, particularly, delays in housing transactions.

But in truth, while housing-related profit warnings have been widespread, the scale of the damage so far has been fairly limited. Given the state of the housing market ? figures from Hometrack this week pointed to house prices falling in October for the 16th month in a row ? UK house builders' profits and share prices have held up relatively well.

Westbury's share price barely moved when it unveiled a 26 per cent fall in first half profits this week and the firm bumped its dividend up by 15 per cent ? and even pointed to an autumn sales uplift. The real damage to profits will come if house sales are f lat next spring.

Regarding contractors, Ernst & Young said that firms supplying the private sector have seen a downturn in orders, aggressive pricing and wafer-thin margins.

That may be its experience, but the recent results season showed most quoted contractors reporting improved construction profits and, despite becoming more selective in the type of work they are bidding for, thicker order books.

This week's results from Willmott Dixon (see above) show that privately owned contractors are also producing good figures and maintaining a positive outlook.