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Supply chain risk and inflation ‘biggest challenge’ to Galliford Try growth

Managing supply chain risks and inflation will be “by far the biggest challenges” for Galliford Try over the next four years, with construction margins expected to remain below 2 per cent until 2018, its construction chief executive has said.

Speaking to Construction News after Galliford Try reported record half-year results, Ken Gillespie said the construction business would continue to face margin pressure for the foreseeable future.

“I strongly believe that coming out of a recession is more difficult than going into one,” he said. “We’ve got rising prices but delivering an order book that was won at more competitive prices. Naturally, it squeezes the margins.”

Across the group, revenue and profits were each up 18 per cent for the six months to 31 December 2013 (H1 2014) with a record pre-tax profit of £38.1m.

The growth was primarily driven by Galliford Try’s housebuilding arm, Linden Homes, where revenue was up 20 per cent to £328.2m (H1 2013: £273.5m) and margins rose to 13.5 per cent (H1 2013: 12.4 per cent).

In construction, however, operating profit fell to £5.5m in H1 2014 compared with £7.4m in H1 2013, as operating margins contracted to 1.4 per cent from 1.8 per cent in the previous year.

In the short term, Galliford Try expects margins in the construction business to contract even further and not recover to 2 per cent until 2018, although this would still be below its 2009 construction margins of 2.4 per cent.

“When the recession hit Galliford Try was in a great position to grow, but the market did not allow that to happen”

Ken Gillespie, Galliford Try

“Managing the supply chain is by far the biggest challenge,” Mr Gillespie said. “Quickly after that comes securing an order book at current prices and trading out the order book won at lower prices.

“If [supply chain partners] go into liquidation during the life of a job, it has a serious impact. Galliford Try has a strong supply chain [and] thankfully we do not have a lot of these issues, but they do occur. Nobody is protected from that environment.”

Galliford Try announced it expects to more than double its full-year 2013 pre-tax profit (£74.1m) and earnings per share by 2018, with a greater increase in the dividend.

Mr Gillespie said he was confident the target could be achieved due to the strong foundations of the business and an increasing volume of work coming to market.

“Going back to where Galliford Try was in 2009, or turnover was £1.2bn, and then it contracted to £800m to £900m,” he said. “When the recession hit Galliford Try was in a great position to grow, but the market did not allow that to happen.”

In construction, the order book has grown 4 per cent on last year to £1.25bn and Mr Gillespie said the volume of work coming to market outside of London and the South-east is encouraging.

Mr Gillespie said that Galliford Try would continue to focus on the sectors where it has developed expertise, including highways and flood defences within the infrastructure business, and education and health within its building arm.

“We have always targeted long-term clients and frameworks – that is our strategy and business, not one-off projects,” he said. “We’re looking for visibility of pipeline because that allows us to plan, and it’s more efficient for the client and for us.”

Buildings or civils?

Margins in the building business were lower in building than in infrastructure in H1 2014, at 1 per cent and 1.8 per cent respectively.

However, Mr Gillespie said there was no intention to focus on more profitable infrastructure projects at the expense of building work.

“I see [building and infrastructure] developing at a similar scale,” he said. “As we move through the economic cycle, building has the potential to get back to those margins.”

 

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