Carillion is the first construction company to suggest there may be a silver lining to the austerity budget, anticipating an “acceleration” of outsourcing as Government departments aim for savings of 25%.
In a trading statement today, ahead of the release of its interim results for the half-year ending 30 June 2010, Carillion said revenue will be lower than in the corresponding period in 2009, chiefly due to “business disposals and equity sales made in 2009, the timing of project starts and completions in the Middle East, and the effect of focusing on margins rather than revenue”.
However, it said “future revenue visibility remains strong, with some 97% of expected full-year revenue in 2010 covered by the order book and probable orders”.
The value of Carillion's order book and 'probable' orders is expected to be similar to that at 31 December 2009 (£19.7bn). Only £500m of that is expected to relate to probable orders from the public sector, making the firm less exposed to any potential cuts.
The firm said it did not expect the cuts to the Building Schools for the Future programme to have a “material impact” on the Group's order book and probable orders.
Carillion described the performance in its construction business (excluding the Middle East) as “satisfactory” and “in line with previously announced plans to restructure our UK construction business to reduce revenue from £1.8bn in 2009 to around £1.2bn over the next three years. This reduction is in line with the cuts in capital spending on construction announced in the UK Government's Emergency Budget on 22 June 2010.”
Support services continues to be the engine of Carillion, and is projected to contribute over half of the Group's underlying operating profit. It said margins in the business are expected to improve due to “ongoing cost reduction”.
“We continue to have a strong order book of long-term contracts in this segment, and a large pipeline of contract opportunities, as both public and private sector organisations seek to reduce costs by outsourcing facilities management and other non-core services,” the statement said.
“Furthermore, as we move through 2011 and into 2012 we expect to benefit from an acceleration in outsourcing by central and local government organisations as they come under increasing pressure to achieve the 25% reduction in spending announced in the UK Government's Emergency Budget on 22 June 2010.”
Carillion's PPP business continues to generate “substantial value” for the Group. It has a portfolio of 26 financially closed projects with £55m invested.
In the Middle East, Carillion said its construction businesses continue to “perform in line with expectations”, with an overall operating margin similar to the 7.7% achieved in the first half of 2009
Summarising the outlook, Carillion said: “We continue to expect market conditions to remain challenging. However, we have a resilient and well balanced business in the UK and internationally with strong revenue visibility and good positions in our market sectors. We remain on track to make further progress in the second half of 2010 in line with market expectations.”