Despite confirmation from the Office for National Statistics of an overall increase of 7.4% in construction output for 2014, the figures show that, after a vigorous growth-spurt in the early and middle months of last year, things cooled down markedly in the final quarter. Indeed ONS reported that output for that period actually decreased by 2.1% in comparison with Q3 2014.
The reduction in output was driven by large falls in repair and maintenance work and even the buoyant house builders were down 4.9%. Nevertheless, Q4 2014 was still 4.8% higher than the same period in 2013.
Slightly more up-to-date figures were provided by the Markit/CIPS Construction Purchasing Managers Index for January suggesting that 2015 may have started better, with the index rising to 59.1 from 57.6 in December.
Whilst perfectly satisfactory, this reading was well below the 2014 average of 61.8 and the second-lowest since September 2013. On the downside, the rate of job creation slipped to a 13- month low.
Markit/CIPS also confirmed what the industry knows all too well: that supply chain pressure persists. The availability of subcontractors has dropped sharply and they are raising prices, increases being particularly prevalent amongst specialists. The National Specialist Contractors Council reported that 44% of its members increased tender prices in Q4 2014. The driver for this upward price pressure is easy to see: 82% of members surveyed told NSCC that they had experienced an increase in suppliers’ prices in the last three months of 2014. Capacity is another key issue, with more than half of NSCC members working at over 90% capacity.
The companies we have analysed for this month’s report are those scaffolding contractors with a turnover of £3m or more in their latest published accounts. Even setting the turnover cut-off point as low as this has again produced a sample of just 19 companies, despite the fact that Companies House records show that there are almost 2,000 UK-registered companies claiming that their principal activity is scaffolding-related.
This graphically illustrates the highly fragmented nature of the sub-sector.
Within this meagre sample, one company stands out: Harsco Infrastructure Services, operator of the SGB brand in the UK and previously part of the Harsco Corporation. Its operations here have suffered severe commercial difficulties over a number of years.
In October 2013 the parent company sold Harsco Infrastructure Services to private equity firm Clayton, Dubilier & Rice, which immediately merged it with another new acquisition, Brand Energy, to create a new business entity. The business now trades in the UK as SGB, a Brand Energy company, although it retained the right to use the Harsco name until the end of last year.
Harsco Infrastructure’s 2013 accounts confirmed that late in that year its activities were transferred to the new entity, which is believed not to have yet filed any accounts. The figures included in our research are from these 2013 accounts. Harsco Infrastructure declared a pre-tax loss for 2013 of £42.9m, which included exceptional restructuring and other charges totalling a net amount of £29.3m, leaving an operating loss of £13.6m. This is the figure we have used for our analysis.
|Company Name||Total assets £m||Total debt £m||Net worth £m||Annual sales £m||Pre-tax profit £m||Financial Health Score (Max 100)|
|Rowecord Total Access||5.8||0.0||4.1||18.9||0.5||87|
|UK Access Solutions||4.7||1.0||1.8||3.4||0.1||28|
|Admiral Scaffolding Group||2.1||0.0||0.2||0.0||0.0||25|
|SHS integrated Services||9.5||5.8||1.8||12.1||-0.5||9|
|Average gearing ratio||114%|
|Average profit margin||-0.8%|
|Return on capital||-8%|
Unfortunately, this scale of loss dwarfs the results of all the other scaffolding contractors within our sample. Throughout this review, we quote the relevant sector statistics both including and excluding Harsco to provide clarity on the true financial state of the sector. It is not of course possible to ignore the performance of Harsco/SGB, because it is such a significant part of the scaffolding and access industry in the UK. The Company Watch research shows a level of profitability for the sector of 5.6% (last year: 2.3%) excluding Harsco but average losses of 0.8% (last year: 4.4%) including it, so there has been a significant improvement in profitability. Without Harsco, the sector is now one of the more profitable construction sub-sectors, beaten only by the 15% earned by plant hire companies and 13% by house builders.
The trade-off between risk and reward varies across the construction industry, particularly when profits and borrowing levels are compared. For our set of scaffolding contractors, gearing is at 114% including Harsco and 34% excluding it. The latter number makes them more conservatively financed than plant hirers (79%) and demolition contractors (39%), but more highly geared than all other sub-sectors.
|Profit margin||Return on capital||% gearing||% with no borrowings||Average health score||% in warning area|
|Utilities & Water contractors||3.9%||23%||6%||46%||57||8%|
Seven of the companies (37%) have no external borrowings at all and three more have negligible debt. This compares with nine companies last year with either no debt or insignificant borrowings. The average return on capital for the sample is negative to the tune of 8% when Harsco is included, but a very respectable positive figure of 22% without it.
Turning next to the overall financial health of our sample, we find an average Company Watch H-Score (see box) of 53 (last year: 54), which is significantly above the norm of 45 for all UK companies of similar size. The relatively low levels of debt play a part in this outcome, as does the fact that there is only one company apart from Harsco with negative net worth (i.e. with liabilities which are greater than its assets). Thus, scaffolders now rank in the middle of the sector comparisons on this measure, with three of the eight sectors we have so far analysed averaging a better H-Score and four scoring below scaffolding.
Six of the scaffolding companies in our sample (32%) are in the Company Watch warning area, the worst sector outcome on this test. Across the economy as a whole, the expectation would be that around 25% of any sample would be in this financial twilight zone.
Looking at the better performers, 58% of the sample have H-Scores of 51 and above, as compared to around 50% for all UK companies. As noted above, only two companies have negative net worth, including Harsco, but five (again including Harsco) are loss-making.
Harsco apart, the results of our research are encouraging, especially in terms of overall financial strength and there has been improvement in the past year on many of the measures which we have researched. But it is worth repeating yet again the comments from our previous reports that our figures cover only the few relatively large players out of a market which also features almost two thousand other smaller, generally undercapitalised and almost exclusively family-owned companies. In addition, there is an even greater host of unincorporated sole traders.
Many spend their time dealing with the negative financial implications of operating within potentially abusive relationships as subcontractors to more powerful and far bigger main contractors. Much more caution is needed about their finances. As we know, insolvencies tend to peak in the aftermath of a major recession as survivor companies, having burnt through their reserves during the downturn, then struggle to raise the extra working capital they need to fund increased sales and investment as things pick up.
The onset of this phenomenon has been delayed in the fall-out from the latest recession because of an extended period of unprecedentedly low interest rates and the unwillingness of major stakeholders to crystallise losses. Even so it would be foolhardy to assume that a rise in failures is not out there waiting to bite commercially and financially fragile scaffolding businesses. The short to medium term prospects for scaffolding contractors remain uncertain, even if the past twelve months have seen a welcome upturn in the fortunes of the larger companies. The major threats are that contractor margins will be pressurized downward by cost increases, together with the very real prospect of political turmoil impacting the allocation of public sector spending after the forthcoming General Election.
This article first appeared in the March 2015 issue of The Construction Index magazine. To read the full magazine online, click here.
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