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City tars majors with harsh brush


THE stock market is arguably over-reacting to some of the disappointments that major contractors' financial results are bringing.

The 13 per cent fall in Alfred McAlpine's share price last week after it said a buyback programme would not continue seemed somewhat harsh.

After reporting a 30 per cent rise in pretax profits, the firm might have expected a warmer reception even if the bright trading picture it painted sat rather uneasily alongside an unchanged dividend.

But despite short-term swings in share prices there are signs that the City is putting pretty much the same share price rating on all of the major contractors.

A year ago, Amec and Balfour Beatty enjoyed prospective p/e ratios in the high teens. Today Amec, Carillion and Alfred McAlpine all have share prices equivalent to between seven and eight times their current year's expected earnings.

Some may be slightly higher, notably Balfour, and others may be lower, such as Mowlem, but the differences are limited.

Given that the average forward p/e ratio of the overall FTSE All Share index is around 15, the uniformly low rating of contractors' share prices is a reflection of the City's bleak view of the outlook for profits.

And on that front, last week's results provided plenty of supporting evidence. The £5 million provision announced by Gleeson against a disputed civils contract is probably a one-off. But it is a further dent to its image following the problems at its homes division last year.

More worrying for the industry are the routine warnings from the majors about the health of various key markets. Kier Group expects a cooling in the commercial market, although it is still finding retail buoyant with leisure, health and education all providing more work.

Alfred McAlpine says the building market remains somewhat depressed, which will have an impact on its special projects business, while Interserve remains 'cautious' about short-term prospects at its industrial services maintenance business.