As we reported this time last year, the fortunes of contractors specialising in the water, gas and electricity sectors are to a large extent at the mercy of government-regulated infrastructure investment cycles. Life therefore tends to be a case of feast or famine.
Last year our analysis covered 2015-16, the first year of the current water sector investment period, Asset Management Plan (AMP) 6, and showed a marked recovery from the slender workloads resulting from AMP5 drawing to a close.
This year, with AMP6 now in full swing, the UK’s top 20 utilities contractors are continuing to enjoy healthy workloads with total turnover for the 2016/18 period up 16.8% to more than £2.6bn and average pre-tax profit margins of 1.7%, up from 0.9%.
But, inevitably, while the general trend is positive, some companies are faring better than others and a few are struggling.
As previously, Morrison Utility Services is far and away the biggest specialist in the sector, and undoubtedly one of the healthiest. In the year to March 31st 2018, Morrison turned over £778.4m (2017: £655.5m) and made a pre-tax profit of £25.5m, up 8.1% from £23.6m the previous year. At 3.3%, pre-tax profit margin was slightly down on 2017’s 3.6%, but was still well above the overall average of 1.7%.
The company attributes its continued growth to a general increase in the water and telecoms sectors, offset slightly by a reduction in work in the electricity industry. Long-term framework contracts with major clients including Thames Water and the National Grid provide stability; the company says that its average client relationship is 14 years.
In its strategic report for the year ending 31st March last year, Morrison reported that it had already secured future contracts to the value of around £1.8bn (or up to £3.2bn, if optional extensions are counted) “providing good visibility of future revenues and activity”.
Part of this forward order book includes one of the frameworks to deliver the diversion of major utilities as part of the first phase of the High Speed 2 rail line between London and Birmingham. “The scope of works will cover multi-utility diversions (gas, water, electric, telecoms, waste) across the 95 mile south and central length of the HS2 Phase 1 Programme,” said the company.
Morrison Utility Services is so dominant that its annual turnover is almost three times that of its closest rival, Clancy Docwra, which reported a turnover of £263.8m during the year to 31st March 2018.
And while Morrison continues to increase its profit margin, Clancy Docwra moved further into the red with a pre-tax loss of £3.6m (2017: -£2.6m). In its latest set of figures, Clancy re-stated its 2017 accounts which had originally showed a break-even situation.
The company says that the year to March 2018 (its 60th anniversary year) “was a difficult year for Clancy Docwra and for the industry as a whole.
“External events have led many organisations to challenge the value and risk inherent in many of their contracts and to recognise in full any potential future losses.”
Last year’s £3.6m loss was largely due to higher operational costs in the power sector and the effects of two significant contractual disputes which the company hopes to resolve this year.
After having carried out a root-and-branch review of the business, Clancy Docwra has altered the criteria on which it accepts new work. “We have increased the intensity of our business review process with a sharp focus on poorly performing contracts,” it says.
It has also made two key boardroom appointments: Nick Blaber, previously chief finance officer for Thames Water’s wholesale division, is the contractor’s new CFO, and Jon Loveday is the new chief commercial officer, also poached from Thames Water where he was executive commercial & transformation director.
The outlook for 2018/19 is “far more positive”, says the company. “With the actions we have taken, we expect Clancy Docwra to return to profit and to generate strong positive cash flow.”
Clancy Docwra is one of four contractors in our selection of top 20 specialists to make a pre-tax loss last year. The biggest loss-maker, Stantec Treatment, notched up (if that’s the correct phrase) a hefty £15.4m loss on turnover of £207m in 2017, having recorded a pre-tax loss of £4.6m the year before on turnover of £173.6m.
Until January 2018, Stantec Treatment was known as MWH Constructors, the name-change the result of the acquisition in May 2016 of the US parent company, MWH Global, by Canadian rival Stantec Inc. Just two years later, Stantec decided it had had enough of the loss-making business and following a “strategic review of the company’s global construction offering”, sold the business to US-based investment fund Oaktree Capital Management.
Now based in Salford, the company has announced that it intends to revert to its previous name of MWH Treatment.
Another company with an eventful recent history is Interserve Industrial Services, sold off by its parent company to Enigma Industrial Services Holdings for £3.6m in October last year.
By the time of the sale, Interserve Industrial Services had already ceased to be active in the utilities sector and what was left of it focused on scaffolding, insulation and painting. Interserve terminated the power industry part of the business in February 2018. The figures quoted in our table relate to the 12 months to 31st December 2017 and show turnover down nearly 35% to £76.8m (2016: £117.6m) with a pre-tax loss of £5m (2016: -£3m).
One of the strongest performers in the sector is water industry specialist JN Bentley. The company, which was bought in 2016 by its joint venture partner Mott MacDonald, says that 2017 “was another year of impressive growth” with record revenues of £257.3m, a 53% increase on 2016’s figure. This puts Bentley in third place on our table of top 20 specialists.
Profitability is also robust: JN Bentley made a profit of £8.3m before tax last year, up from £6.8m the year before.
Over 80% of JN Bentley’s work is for six on the UK’s largest water and sewerage companies. “Managed in five-year ‘AMP’ cycles, 2017/18 represents the traditional peak of the AMP for these clients, accounting for the record increase in turnover,” the company acknowledges.
Other strong performers include Barhale, O’Connor Utilities, Biwater and Black & Veatch – the latter two both having increased turnover substantially and turned hefty pre-tax losses in 2016 into respectable profits in their most recent results.
This article was first published in the March 2019 issue of The Construction Index magazine