Contractors risk jeopardising investor confidence with ambiguous order books at a time when uncertainty is already rife in the markets, a leading financial services firm has warned.
Research from accountancy firm Grant Thornton, shared exclusively with Construction News, analysed the relationship between contractors’ order books and their share prices in 2011.
It reveals a total average rise of 1.85 per cent in order books, compared with the FTSE 350 Construction & Materials share index, which saw a 13.1 per cent fall.
Grant Thornton partner Phil Westerman said he was concerned the inconsistency in reporting methods for order books used by contractors could undermine the recovery.
Mr Westerman said order books were “one of the key indices to generate and support both investor confidence and the confidence of other users of the financial statements” including customers, suppliers, trade insurers and funders.
“We believe there is a large degree of inconsistency in the basis of preparation of the order book disclosures, of what is included, and the methodology applied in arriving at the numbers disclosed,” he said.
Calling for fuller disclosure of how firms compile order books, he said: “Generating support for standard best practice in this area, leading to increased visibility, reliability and consistency of the numbers published could help increase users’ confidence in the published information, and could help the sector in its continued recovery from what has been a very difficult period.”
The research analysed the performance of 10 major firms. It found a total order book of £56.45 billion in 2011, down marginally from the £57bn total six months ago and subject to final year results.
Mr Westerman said that together with protecting gross margin, accurate and consistent reporting of order book numbers across listed businesses “cannot be underestimated”.
Ernst & Young real estate and construction director Adrian Mulea agreed it could be helpful for companies to extend their order book detail to include “more meaningful information” such as sector breakdowns and types of contracts.
Kier chief executive Paul Sheffield said he was often surprised when smaller companies than Kier published larger order books.
“I think frameworks probably create a bit of confusion as to what is in an order book. In our opinion, it is not in your order book until a job is identified and contract signed,” he said.
Interserve group finance director Tim Haywood said another layer of quantitative reporting regulation “could generate more work and little additional insight”.
Falls in share price reflect a number of factors, he said, including contract profitability trends and sector preferences among investors.
Panmure Gordon analyst Andy Brown said: “I think the market is overreacting to the spending cuts, ignoring the order books and missing an opportunity with these low valuations.”
Numis Securities analyst Howard Seymour said: “Margin pressures are the key concern of the investment community, so order book growth is not necessarily seen as a good thing at present.”