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Wed October 28 2020

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Public sector contractors feel budget pinch

28 Jun 10 Share prices have plunged at leading contractors who depend heavily on public sector construction and maintenance work due to fears about the impact of last week's budget.

Share prices have plunged at leading contractors who depend heavily on public sector construction and maintenance work due to fears about the impact of last week's budget.

Local authority specialist Connaught lost a third of its market value after issuing a profit warning late on Friday, which saw a third of the firm's market value – some £150m – wiped.

A statement from the firm said: “Following the emergency budget, the company has identified 31 contracts within its Social Housing division where a proportion of the value relating to capital expenditure has been deferred.

“This will impact revenue by around £80m and EBITA by £13m in the current financial year. If this were to continue we anticipate a reduction of revenue by £120m and EBITA (profit before tax, interest and amortisation) by £16m for financial year 2011. As a result we expect a one-off impact to our cash conversion rate, reducing to around 40% this financial year.”

Connaught, which in April unveiled half-year results showing turnover of £355m and a £2.5bn order book, said it is continuing with a previously-announced cost-reduction programme, which “is expected to yield savings of at least £25m for financial year 2012”.

Connaught is the first contractor to assess the impact of Chanceller George Osborne's spending cuts on its business.

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Meanwhile, Mears, which operates in similar sectors to Connaught, was forced to issue a statement of its own to calm market fears after losing 8% of its own market value, with shares tumbling 21p to 249p on Friday.

The firm said it is “not experiencing any downward pressure on spend in its social housing business. Current trading and strong cash conversion for the year are in line with management expectations”.

Mears added there was “no evidence or experience of downward pressure in spending in social housing which remains a largely secure and non-discretionary spend”.

However, there is speculation that Monday will see further downward pressure on shares prices of contractors exposed to public sector markets, as the impact of the emergency budget begins to bite.

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