With the amount of new construction work being let every month, a casual observer might assume that contractors employed at the front end of any project (primarily the earthmovers and piling and foundation specialists) are having a busy time.
But our analysis of the latest financial results of the 20 leading piling specialists this year suggests that there’s barely enough profitable work to go around.
There were signs of a chill blowing through the sector this time last year when overall revenues slipped about 3% and pre-tax profits plummeted almost 60%. This year, overall revenues for the top 20 piling firms slumped a further 17.8%, from £836.2m to £687.4m.
Far worse, though, is that this year profitability has dropped off the scale and for the first time in our six years of Sector Focus analysis we have seen the 20 leading companies in their sector make a collective loss before tax.
Fourteen of the 20 companies listed opposite reported a drop in pre-tax profits in their latest results. Nine of them made losses totalling £21.5m. Meanwhile the 11 companies that reported pre-tax profits mustered just £11.9m between them.
The biggest loss-maker in our top 20 group is Cementation Skanska, which posted pre-tax losses of £10m in the year to December 2019. The primary reason given for this was “a provision on a contract where the business was in dispute at the year-end”, said the company.
That’s bad luck, certainly, but at least Cementation can put that misfortune behind it and carry on investing “to ensure that it continues to build upon its place in the piling, foundations and ground engineering market”.
Cementation has to put on a brave face. After all, until a couple of years ago, parent company Skanska UK was keen to sell it off. The sale was only called off after a potential buyer decided the price was too high – whereupon Skanska declared that it would only sell to a buyer “whose values and culture were aligned to Skanska’s and which was willing to pay what we considered to be the right price for a world-class business”.
Cementation was duly taken back into the fold, but by the end of 2020 there were fresh rumours that Skanska was aiming to sell Cementation. The rumours proved unfounded but in light of recent events it would be surprising if Skanska were not still open to offers.
Despite Cementation’s 2019 losses – and a nearly 30% drop in turnover (from £62.4m in 2018 to £44.6m) the business is still a very big hitter within the sector. It scored a notable success in May this year when it landed a £93m contract to install a 1km-long open-cut retaining box for HS2 just north of Euston Station.
One of Skanska’s main reasons for wanting to sell off Cementation back in 2018 was that it was a ‘non-core’ business (the other main reason was that Skanska wanted the money). But Cementation is by no means the only piling specialist to operate as a ‘non-core’ subsidiary of a Tier 1 building or civil engineering contractor.
The UK’s largest piling contractor, Expanded, is owned by Laing O’Rourke, which shows no sign of wanting to get rid of it despite the fact that its turnover figure fell more than 40% last year (from £244.8m in 2019 to £140m in the 12 months to March 2020).
Maybe that’s because Expanded actually made a profit of £7.6m last year, whereas in 2019 it recorded a pre-tax loss of £1.2m.
Rock & Alluvium is another top 20 piling firm that is owned by a leading Tier 1 contractor – in this case, Galliford Try. And, like Expanded, it too saw turnover fall by just over 40% in 2019/20. Unfortunately, Rock & Alluvium also saw the previous year’s £1m pre-tax profit become a £500,000 loss last year.
Similarly VolkerGround Engineering (VGE) is a subsidiary of contractor VolkerStevin, itself part of Dutch-owned VolkerWessels UK. While VGE saw turnover increase by about 10% in 2019 (to £20.8m) it made a pre-tax loss of £4.1m (the second-largest loss on our table), compared to the previous year’s £1m profit.
VGE speaks for many when, in its strategic report, it says: “Trading conditions in the UK remained difficult throughout 2019 with a continued lack of clarity to business around the UK’s future relationship with the EU a key factor”.
The company’s revenue growth is attributed to a policy of seeking more work outside its parent company. “The company has focused its strategy on becoming less reliant on delivering projects for internal companies within VolkerWessels UK and has grown its volume by 111% within the external market,” explains the strategic report.
This policy of exploring alternative markets has bolstered resilience, says the company, and has justified investment in new specialist equipment. “This has reinforced our strategy of being a leading provider to the highway infrastructure and flood defence markets,” declares VGE.
The losses reported for the period are the result of “some significant operational problems on a small number of contracts,” explains VGE. “The final accounts on these contracts remain under negotiation and we therefore have recognised reduced project margins until such discussions are concluded. We anticipate partial recovery in 2020 following the agreement of final accounts,” it continues.
On the face of it, Essex-based Central Piling saw the steepest decline in revenues last year with turnover down 45.4%, from £16.3m in 2018 to £8.9m in its latest results. But Central has changed its reporting period from the end of June to the year-end and so these results are actually for the six months from June to December 2019.
In view of that, Central’s turnover looks to be growing. Meanwhile 2018/19’s pre-tax loss of £600,000 was put into reverse, resulting in a £100,000 pre-tax profit for the six months to the end of 2019.
“We consolidated performance in the second half of the previous financial year and were able to capitalise on the cost savings and procedural changes that we had made which served to increase actual gross margin,” said Central’s managing director Steve Hadley.
“When HS2 finally gets underway in earnest during 2021 we anticipate the piling market size to significantly increase…and margins to rise. We have a stable workforce with equipment and facilities to take advantage of those opportunities,” added Hadley.
While revenues and profit margins mostly shrank elsewhere in the sector, one company – West Bromwich-based Forkers – bucked the trend with a 60% surge in turnover to £30.7m in the year to March 2020 (2019: £19.2m).
Forkers isn’t the most profitable of our 20 top piling firms (that’s Bauer Technologies with a margin of 6.3%, closely followed by Ivor King with 5.9%); its pre-tax profit in 2019 was less than £50,000. But last year it pushed this up to just over £730,000.
“Many directors who wrote in their company’s strategic reports before December 2019 would not have envisaged that within three months business would be plunged into a parlous state as a result of Covid-19 and many companies and businesses would be placed under great financial pressure and that certain of those businesses and companies would not survive,” observed company secretary Rosaleen Curran.
These observations have made Forkers more wary of its exposure to debt: “Our company has increased enquiries into the financial positions of its clients before accepting contracts for work,” continued Curran. “Strict observation of debtors’ ledgers is maintained to ensure that clients pay their liabilities within the pre-agreed timetable.”
Given the direction in which the piling sector appears to be moving, Forkers’ uncompromising approach to financial risk seems very wise indeed.