Which contractors have remained profitable in the recession? (Part 2)

Margins as a whole have decreased sharply. But certain types of businesses seem to be in better shape in terms of profitability than others. Caution should be exercised in reading too much into profit figures – which more than turnover, vary widely from year to year and therefore only provide a snapshot, which can be hugely affected by one-off exceptional issues in any one year. However, with this proviso, the data is below.

2014 top 20 contractors, ranked by the increase in margin compared to the figures in Building’s 2008 Top 150 Contractors and Housebuilders*

The most obvious lesson from these numbers, at a basic level, is that those that have focused most on general construction seem to be less profitable than the firms which have either diversified, or specialised. The most obvious example of the success of diversification is Galliford Try’s private housebuilding business, Linden, from which the group gets about 40% of its revenue. Galliford Try has the single highest pre-tax margin in the top 20, of over 5%, but the vast majority of this profit (84%) comes from its housing business – which makes an operating margin of over 13%.

Carillion, likewise, has kept a relatively high margin for a contractor, at 2.7%, and even increased this over the period. It has done this by pursuing a strategy of deliberately downsizing its UK construction business, and instead expanding its support services business and overseas construction work.

Balfour is just one example where a growth in revenue has been accompanied by poor profitability

The experience of Balfour Beatty, though, does potentially indicate the limits of the benefits of diversification. It grew turnover very quickly through acquisition over the period – mainly overseas – in an attempt to be a “one-stop shop” provider of infrastructure services through the lifetime of a project. However, the contractor has admitted its customers did not want this service as much as expected during the recession, and its most recent figures show a pre-tax margin of just 0.47%, a fall of more than three quarters. It is now in a process of divesting businesses to focus on its core activities.

Balfour is just one example where a growth in revenue has been accompanied by poor profitability. ISG, for example, has seen its margin fall by over 80% in the period despite revenue growing by more than half to £1.28bn. Likewise Vinci UK grew revenue by almost two-thirds to £1.26bn, but pre tax profits fell to just £7.2m, a margin of only 0.57%.

Alastair Stewart, construction analyst at Progressive Research, says: “This highlights two issues affecting the wider construction sector: to what extent are contractors tempted to ‘buy work’ during a downturn and what type of work are they taking on. Companies can be tempted to take on work with what looks like zero margins, in order to pay creditors, but, with any false assumptions, these can turn negative.”

The biggest rise in pre-tax margin over the period, of over 50%, shows the benefit of another strategy – specialisation. VolkerWessels is focused solely on the infrastructure sector and has been able to benefit from the continuing spend of major clients, such as Network Rail, who have maintained their reliance on framework contracts through the recession.

The third and final installment of the series, revealing the contractors with the steepest falls and most impressive growth in turnover, will be published on www.building.co.uk tomorrow

*The data for 2008 is from Building magazine’s Top 150 Contractors and housebuilders for that year. This was based on the most recent published data at the time of printing in June 2008, which for most firms covered the 2007 financial year. All data for 2014 is from most recent published accounts, which is for the 2013 year for all except Keller and Skanska. The figures for Bovis Lend Lease and Lend Lease refer to UK operations only, Skanska results refer to Skanska UK.