{"id":506053,"date":"2024-09-17T09:15:20","date_gmt":"2024-09-17T08:15:20","guid":{"rendered":"https:\/\/www.constructionnews.co.uk\/?p=506053"},"modified":"2024-09-17T09:18:32","modified_gmt":"2024-09-17T08:18:32","slug":"cn100-2024-snakes-ladders","status":"publish","type":"post","link":"https:\/\/www.constructionnews.co.uk\/sections\/long-reads\/cn100-2024-snakes-ladders-17-09-2024\/","title":{"rendered":"CN100 2024: Snakes & ladders"},"content":{"rendered":"

Rising turnover and slumping profit characterise the CN100 2024 index of top UK contractors, but the outlook remains broadly positive<\/strong><\/em><\/p>\n

There is a saying among economists that \u201cif you torture the data long enough, it will confess\u201d. At Construction News <\/em>we like to think that our interrogation techniques reveal the truth less violently. The latest CN100 index of top contractors reflects a mixed bag of results, as aggregate turnover growth is offset by a sizeable decrease in pre-tax profit. This is partly due to high interest rates and the double-edged impact of inflation, which helped to boost some firms\u2019 revenues while also increasing their cost of sales. Margins narrowed but firms still borrowed more overall and increased their headcounts. This indicates optimism for the future as companies gear up for increased activity, some analysts tell CN<\/em> \u2013 without the need for thumbscrews.<\/p>\n

The broken relationship between turnover and profit in this year\u2019s table \u2013 which covers annual accounts filed with Companies House in the year to 16 August 2024 \u2013 is not universal across the 2024 CN100, and the raw figures alone do not tell the full story. \u201cWe\u2019ve seen a big rise in emergent areas like data centres and cloud computing, where there\u2019s a significant growth story,\u201d says Max Jones, director of infrastructure and construction at Lloyds Bank. \u201cConversely, those [contractors] with exposure to commercial real estate have seen activity slow due to high interest rates. Some companies are struggling to keep up with economic pressures, while others are finding ways to thrive in this environment.\u201d<\/p>\n

Companies such as NG Bailey reevaluated their strategies in response to the challenges they faced from Brexit, the Covid pandemic and the macroeconomic recession. But chief executive Jonathan Stockton noticed a calming of recent years\u2019 turbulent waters over the past 12 months.. \u201cCertainly I think we\u2019ve seen a bit more stability in the pipeline of work,\u201d he tells CN<\/em>.<\/p>\n

Total annual construction output, however, increased by just 2 per cent in 2023 compared with the previous year, according to the Office for National Statistics. And six Bank of England base rate rises between October 2022 and August 2023 slowed down investment, says Jones. \u201cWe entered a new cycle around interest rates that\u2019s impacted pipelines in specific areas,\u201d he explains.<\/p>\n

As this new cycle manifested itself, CN<\/em> analyses how major contractors performed. How and why were their revenue, profit and other financial indicators affected?<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

Rising revenue<\/h3>\n

Turnover increased by 7 per cent year-on-year for the companies in the CN100 2024, reaching a total of \u00a375.96bn. Hill Holdings and Morgan Sindall each boosted their revenue by more than \u00a3500m, though the former was helped by a 15-month accounting period. Mechanical and electrical (M&E) specialist Gratte Brothers rose 29 places to 66th position after doubling its turnover to \u00a3250.1m. Managing director Remi Suzan says an increased focus on data centres helped drive Gratte\u2019s revenue upwards, adding: \u201cThese areas are growing rapidly as the demand for digital infrastructure increases.\u201d<\/p>\n

\n

CN Premium subscribers<\/a> can view and manipulate this year\u2019s CN100 data with new metrics – and compare selected company performance across the past seven years at our newly-revamped CN Intelligence data hub. Next week, <\/em>CN Premium subscribers and Basic Subscribers will get exclusive access to a 3,000-word written analysis of the 2024 CN100 data.<\/em><\/p>\n

Visit CN Intelligence<\/a><\/h2>\n
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Other firms such as Kajima Europe, new entrant Clegg and Altrad reported revenue growth of 50 per cent or more. Jones believes that inflation played a significant role in boosting turnover numbers \u201ceven if underlying performance hasn\u2019t necessarily improved\u201d. But Suzan takes a slightly different view. \u201cThe increase in turnover is partly due to inflation, but it also reflects a general recovery in the sector and increased activity in high-growth [technology] areas,\u201d he explains.<\/p>\n

On the other hand, 24 contractors saw lower revenue than the year before. Cruden Holdings, RG Carter, Winvic, and TSL each saw year-on-year turnover fall by more than 20 per cent.<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

Paul Gandy, chief executive of Tilbury Douglas, says the inflation crisis, \u201cwhere it wasn\u2019t anticipated or adequately mitigated, is behind many of the problems\u201d facing firms. He adds that contractors in the medium and high-rise residential sector are seeing higher legacy provisions, in particular for cladding and fire-related issues. Bouygues, for instance, doubled its provisions for potential post-completion liabilities to \u00a362m last year.<\/p>\n

Stockton tells CN<\/em> that turnover alone doesn\u2019tgive a true indication of a company\u2019s health. \u201cWe refer to \u2018dead sales\u2019 \u2013 revenue that\u2019s in the [financial] numbers that doesn\u2019t translate into margin because it refers to problem jobs. I suspect the level of dead sales in the top 100 is higher than the average of a normal year.\u201d Gandy agrees that chasing revenue runs the risk of turning into a fool\u2019s errand, saying: \u201cIt\u2019s easy to grow unprofitably.\u201d<\/p>\n

Kelly Boorman, national head of construction at consultancy RSM UK, says: \u201cWhat we have seen are some firms thinking, \u2018Are we going to do some of these complex major contracts? Because we\u2019ve been burned quite heavily. Let\u2019s step away from them a little bit\u2019.\u201d<\/p>\n

Slumping profit<\/h3>\n

Aggregate pre-tax profit in this year\u2019s CN100 plummeted by 35 per cent to \u00a3985.5m. What caused this slump? The answer partly lies with three tier one firms that posted eye-watering losses in the past year. Laing O\u2019Rourke was the worst affected, with a \u00a3288m deficit compared with a \u00a32.7m profit the year before, despite higher revenue. Bouygues\u2019 slide into the red deepened from \u00a331.7m to \u00a3182.6m, again despite higher turnover. Rounding off the trio is Sir Robert McAlpine, which posted a \u00a3102.6m loss compared with a \u00a34.8m profit the year before.<\/p>\n

Nine companies made a profit after posting losses in the previous index. \u201cThose firms that returned to profit were likely more successful in managing their costs and choosing their projects wisely,\u201d says Mani Singh, senior account manager at insurer Tryg Garanti. Of the 22 contractors reporting revenue of \u00a31bn or more, though, the latest CN100 shows that 12 posted lower profit figures or saw their losses worsen.<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

The divergence between revenue growth and profitability experienced by Laing O\u2019Rourke and Bouygues was shared by fellow \u00a31bn-plus turnover contractors Bowmer & Kirkland, Graham, Vinci and Willmott Dixon. But the disconnect was felt throughout the CN100 \u2013 almost one-third (30) of this year\u2019s firms saw pre-tax profit fall despite higher revenue (see table above for the top 10).<\/p>\n

Inflation has had a lingering impact, especially on fixed-price contracts agreed before materials costs surged. Materials prices rose by 19 per cent in 2022, before easing in 2023, official data shows. But by then, many firms\u2019 bottom lines had taken a hit as they struggled to manage escalating costs.<\/p>\n

Not all firms suffered \u2013 both Kier and McLaren more than trebled their pre-tax profit, for instance, and NG Bailey rose four places to 33rd and returned to profitability in the year to 31
\nMarch 2024.<\/p>\n

Margin issues<\/h3>\n

Thin margins remain an issue for the construction sector and the CN100 firms are no exception. Average profit margin narrowed from 2.7 per cent in last year\u2019s table to 2.1 per cent this year. A total of 48 firms improved their margins \u2013 two more than last year \u2013 but 25 of them did so by 1 per cent or less. Costain and RGCM made tiny margin improvements of 0.01 and 0.02 per cent respectively. This underlines how difficult it is for contractors to move the needle on profitability. \u201cClients have been driving very tough bargains, which affected profit margins last year,\u201d says Boorman. \u201cBetter contracts and procurement processes have emerged post-Covid, but there\u2019s still very little margin [for contractors] to play with.\u201d<\/p>\n

The UK\u2019s biggest contractor, Balfour Beatty, saw its margin thin from 3.8 to 3.1 per cent in 2023. In a mid-August 2024 call with analysts following the contractor\u2019s interim results, chief executive Leo Quinn said: \u201cI would be very surprised if a blind man with a white stick couldn\u2019t deliver 3 per cent in 2026.\u201d Despite this optimism, the latest CN100 data shows that only 12 companies increased their margin by 3 per cent or more. \u201cFirms that managed to broaden their margins typically had a strong presence in sectors less affected by volatility, such as infrastructure or public sector work,\u201d says David Hayhow, head of insurer Lockton\u2019s global construction practice.<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

Tilbury Douglas made the best margin improvement among the firms in this year\u2019s CN100 with a swing from -24.6 per cent in 2022 to 0.6 per cent the following year. The firm\u2019s pre-tax profit of \u00a32.8m contrasted starkly with its 2022 performance, when it reported a \u00a396.3m pre-tax loss due to legacy costs associated with its separation from Interserve Group. Gandy tells CN<\/em> that the firm overcame a rocky period by reorganising the business as a standalone contractor and ensuring \u201cthere is strict control on risk\u201d.<\/p>\n

Jones emphasises that strategic project selection is important, saying: \u201cWe\u2019re seeing a trend in the tier twos and threes towards specialising and focusing on driving higher margins from being more specialist.\u201d This was borne out by Renew, which broadened its margin from 6.1 to 6.8 per cent in the year to 30 September 2023 as activity increased in the rail, infrastructure, energy and environmental sectors. But the trend wasn\u2019t universal \u2013 infrastructure specialist OCU Group\u2019s margin slumped from 13.7 to 1.7 per cent, and despite doubling its turnover, Gratte Brothers\u2019 margin shrank from 1.3 to 0.8 per cent.<\/p>\n

Green agenda<\/h3>\n

The net-zero and decarbonisation market is potentially worth hundreds of billions of pounds, according to Jones, leading to more orders in the hydrogen economy, port infrastructure, offshore and onshore wind, solar, and carbon capture and storage. In this context, firms are increasingly focusing on projects that support the transition to a low-carbon economy. Gandy notes that decarbonisation has been \u201cembedded in an increasing number of contract awards\u201d, adding that contractors with specialist M&E skills or positions on decarbonisation frameworks \u201cwill support business growth going forward\u201d.<\/p>\n

Stockton highlights decarbonisation-related growth opportunities for contractors in sectors like electrical vehicle charging infrastructure. Suzan also sees the push towards net zero as \u201ca significant factor in project decisions\u201d.<\/p>\n

But the green drive has mixed financial effects, says Hayhow. Some companies are seeing increased costs as they invest in eco-friendly technologies, \u201cwhile others are finding new opportunities in the sustainability sector\u201d, he says. \u201cThere\u2019s a growing emphasis on sustainability in tendering processes, which is starting to reflect in the financial performance of companies that have embraced these initiatives.\u201d<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

Cash guardians<\/h3>\n

Most firms (54) in this year\u2019s CN100 increased their cash reserves, suggesting strong cost control and a strategic shift towards maintaining liquidity. \u201cCash preservation has become a key focus,\u201d says Jones, \u201cwith many companies holding onto reserves to weather any further economic instability.\u201d<\/p>\n

In all, the top 100 firms held a combined total of \u00a39.85bn in cash, up from \u00a39.52bn in the 2023 table. Balfour Beatty and Seddon were among the firms boosting their cash positions despite lower profits, and Singh believes that maintaining cash reserves is a prudent strategy. \u201cThe increase [in cash at hand] reflects a cautious approach to financial management. Companies are prioritising liquidity as a buffer against future uncertainties,\u201d he explains.<\/p>\n

But contractors and analysts are aware that protecting cash cannot be the only consideration. \u201cFortune will favour those who look after their supply chain and make sure that liquidity is being paid fairly and on time,\u201d says Hayhow. A \u201chealthy cash balance absolutely should not be protected at the expense of a supply chain\u2019s strength and cash position\u201d, Ferrovial Construction managing director Karl Goose tells CN<\/em>.<\/p>\n

\u201cThe availability of surety bonds has been an important factor in contractor liquidity, performance and arguably insolvency,\u201d adds Hayhow. Gandy mentions that the supply chain has been damaged by inflation and main contractor insolvencies, but adds that the situation is improving. \u201cWe anticipate that these impacts are now working through the system and that as a result the situation will stabilise,\u201d he says.<\/p>\n

Jones says that contractors with vertically integrated supply chains \u201cand maybe those able to control costs more in-house\u201d have prospered, but confidence in the supply chain remains brittle. \u201cConfidence is slowly returning, but it\u2019s clear that companies are being much more selective about who they work with,\u201d says Suzan.<\/p>\n

Such caution is justified by some stark statistics from the Insolvency Service. Its data shows that in 2023 (the period covered by most CN100 firms\u2019 accounts) a record 4,371 construction firms collapsed \u2013 more than any other industry. And this year, Lonsdale (77th in the 2023 index), Osborne (56th) and Readie (55th) are missing from the CN100 2024 after falling into administration.<\/p>\n

Borrowings<\/h3>\n

Aggregate loan debt in the CN100 this year increased by 27 per cent from \u00a33.53bn to \u00a34.47bn. Five firms more than doubled their borrowings: Amey, Severfield, Mount Anvil, Portakabin and Durkan Holdings. OCU Group \u2013 the highest new entrant (43rd) \u2013 took on the most new debt with a \u00a3244m increase. A total of 23 companies borrowed less, and 10 \u2013 including Vinci and Wates \u2013 paid off all their loan debt. Balfour Beatty, Laing O\u2019Rourke and Skanska UK each borrowed more despite thinner pre-tax margins. While this might indicate confidence in future growth, it also raises concerns about debt sustainability, especially if economic conditions deteriorate again.<\/p>\n

Higher borrowings suggest that firms are either financing ongoing operations through debt or investing heavily in future projects. With the construction industry on the cusp of a transformation driven by decarbonisation and infrastructure upgrades, companies are borrowing to expand their capabilities and secure their positions in a rapidly evolving market.<\/p>\n

Jones and Suzan say that borrowing increased as some companies sought to finance growth in strategic areas. \u201cThe increase in borrowing suggests that some firms still need to finance operations or invest in new projects, despite the risks,\u201d the former adds. \u201cCompanies will be investing in the skills and the assets and the tech that they need to deliver the next generation of jobs and skills. Access to bonding and guarantees will be key for the sector \u2013 there\u2019s a changing market for bonding availability.\u201d<\/p>\n

Some firms found it difficult to access bank loans. Singh says that access to finance is becoming more challenging, particularly for smaller contractors, and Hayhow thinks that lenders are being more selective and cautious. Debt renewal and how companies manage their repayment terms are critical, Boorman notes, adding: \u201cIf firms have repayment debt that\u2019s eating into their profits, it will be a challenge to manage working capital moving forward.\u201d<\/p>\n

Headcount and wages<\/h3>\n

Despite the pressure on profitability, CN100 companies increased their headcount by a combined 11,111 employees, reflecting a degree of confidence in future growth and the need to meet the demands of large, ongoing projects. However, this expansion comes with its own set of challenges, particularly around wage inflation and skill shortages.<\/p>\n

A total of 77 firms increased the size of their workforce, with double-digit percentage recruitment growth from Galliford Try and McLaren, for instance.\u00a0 \u201cIt speaks to recovery, and positioning for growth. It reflects greater optimism in the outlook,\u201d says Jones, especially for firms with positions on long-term infrastructure frameworks.<\/p>\n

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View and manipulate more 2024 CN100 data at the CN Intelligence<\/a> hub<\/em><\/p><\/div>\n

Mace chief financial officer David Allen is also optimistic. He tells CN<\/em> that as trading conditions last year became \u201cmore benign\u201d and inflation eased, lower financing costs made it \u201ceasier for clients to confirm the viability of their projects, so there\u2019s more work to bid for and deliver. This creates a need for more people, and I see workforce growth as a hugely positive leading indicator for our sector.\u201d<\/p>\n

But it will be tricky to find more workers if the recovery in construction gathers pace and more large projects are awarded, given the industry\u2019s well-known labour shortage. \u201cThere\u2019ll be a tension around labour resource if both the resi market and infrastructure projects pick up simultaneously, driving up labour prices,\u201d Boorman explains.<\/p>\n

Average wages among CN100 companies rose by 3 per cent this year, lower than the previous year\u2019s 3.8 per cent increase and modest compared with the broader economic inflation rates experienced since 2022. Contractors managed to control wages \u201cthrough a combination of cost management strategies and a focus on productivity improvements\u201d, Hayhow says. But even these internal efficiencies may not stop wage growth. Gandy notes the pressure to provide competitive market salaries, while Jones foresees \u201csome wage inflation coming through as demand for labour picks up\u201d, spurred partly by the need for special skills to implement the net-zero transition.<\/p>\n

Outlook<\/h3>\n

Singh tells CN<\/em> that he expects more mergers and acquisitions as contractors seek to acquire capabilities that will help them grow in strategic areas. At the time of writing, ISG was in the process of changing ownership and hadn\u2019t filed its latest annual accounts. Lendlease\u2019s European construction business is also on the market, while TClarke and RJ McLeod are being acquired by Regent and OCU respectively. Private equity is making its presence felt: Antin Infrastructure Partners bought Portakabin in May 2024, M Group was sold to CVC the following month, and EMK Capital acquired Keltbray\u2019s infrastructure arm in August.<\/p>\n

Further interest rate cuts could provide a boost to contractors, but uncertainty remains in an industry buffeted by multiple headwinds in recent years. \u201cOutlook-wise, we\u2019re heading into a more optimistic phase,\u201d Jones says, \u201cand inflation is cooling, particularly goods inflation.\u201d But Hayhow warns that much will depend on macroeconomic conditions and government policy, while Singh says \u201ccompanies will need to stay agile to adapt to the changes that lie ahead\u201d.<\/p>\n

From a contractor perspective, Gandy urges the government to waste no time catalysing the public sector market after the hiatus caused by the July general election. \u201cIt is essential that the deal flow is reestablished to avoid damage to the industry,\u201d he says. \u201cPipeline seems to be suffering from delays in decision-making as a result of uncertainty following the change in government. We hope \u2013 and it has to be the case \u2013 that this is a temporary situation.\u201d He has a kindred spirit in Ferrovial\u2019s Goose, who hopes that the \u201csteady infrastructure pipeline our industry so relies upon will now be possible. It\u2019s in everyone\u2019s interest.\u201d<\/p>\n

As contractors look ahead, their ability to roll with the punches will determine whether they thrive or struggle. The ongoing transformation towards a more sustainable, technologically advanced construction sector offers immense potential, but only for those able to navigate a complex financial landscape.<\/p>\n","protected":false},"excerpt":{"rendered":"

Rising turnover and slumping profit characterise the CN100 2024 index of top UK contractors, but the outlook remains broadly positive There is a saying among economists that \u201cif you torture the data long enough, it will confess\u201d. At Construction News we like to think that our interrogation techniques reveal the truth less violently. The latest …<\/p>\n","protected":false},"author":135716,"featured_media":506056,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ep_exclude_from_search":false},"categories":[78193,552,559],"tags":[],"yoast_head":"\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\t\n\t\n\t\n