Welcome to the 2009 Top 150 contractors and housebuilders, ranked by everything from turnover to average pay. This year’s results reflect the calm that prevailed before the storm broke over contractors. But, come next year, which of them will be catching their deaths – and which will be singing in the rain?

There is an air of unreality about this year’s league table. Almost all the firms in it are ranked on a financial year that ended in 2008. Back then, most contractors were working on jobs they had won two years ago, before the world’s banks caught fire and had to be hosed down with taxpayers’ money. But with construction output expected to fall by at least 16-17% in 2009, according to Hewes Associates, next year’s numbers are going to give a better picture of where we are now.

It is different for housebuilders, of course. As they were one of the first victims of the credit crunch, the rankings show the full effects of their downturn on them. So, Taylor Wimpey was top of the 150 table for pre-tax profit in 2007 with £777m, last in 2008 (–£19.5m) and last by a very long way indeed in this year’s table (a disastrous –£2bn). Or, to put it another way, 14 of the 16 firms that made a loss were (largely or entirely) housebuilders.

But if we forget about the recession for a moment and look ahead to the future, the question becomes which firms will be best placed to endure the storm and then recover when the sun shines again. So, from the 150, ranked by turnover, we pick out the top five contractors and top five housebuilders and assess their prospects …

How we worked out the rating

We have given each of the five companies marks out of five for how
well placed they are to address five criteria. We’ve then calculated an average score to arrive at their recovery rating. The criteria are:For contractorsSecurity of public sector work
The public sector is an umbrella that is about to blow inside out. Pretty soon the government will have little ability to invest in anything but rail, energy (especially nuclear and renewables) and waste. Spending on health and education is more uncertain, and water companies have just been told by regulator Ofwat to cut their customers’ bills, which will cut their construction spend. We have awarded higher scores for capacity to work in those areas that are still keeping the rain off. PFI business
Contractors with large PFI businesses have also picked up points. We know some commentators are questioning whether the PFI has a future, owing to banks’ reluctance to invest in anything, let alone 30-year deals, but we have assumed that it does. Most analysts believe borrowing will ease in future, and insurance and pension companies are still going to be in the long-term loan market. Also, the government is going to rely on private finance as it never has before … Strength of overseas business
An overseas presence was a point winner because it may allow a firm to move resources to countries that recover early. For example, a US operation could be good if the Americans, who were first into recession, are the first out.
Strength of support services business
We scored contractors with a strong support services offering highly because this delivers a predictable revenue flow. Plus, if the government has less money to spend in the next few years it could look to outsource more of this kind of work.Debt position
We have awarded points for low levels of debt because the more money you owe the bank the less scope there is to seize on the new opportunities that appear in a recovery. Extra points, too, for larger cash reserves. And for housebuilders …Debt position
The more money a firm has, the more sites it can buy and begin work on.Quality of landbank
Housebuilders with low debts and long landbanks (that is, ones that have recently been bought) are well placed, as are debt-free firms with short landbanks, as they will be able to find the cash to replenish their stock. Quality of the management team
We’ve rated this on managers’ performance in the downturn so far, for buying the right land at the right time, and for their potential to innovate, for instance by developing off-site manufacturing. Strength of sales and marketing
Points are given for the ability to advertise and sell stock – particularly online.

Contractors Balfour and Kier all set for sunnier days

Balfour Beatty Balfour Beatty tops our turnover rankings of contractors and housebuilders again this year with revenue of £9.4bn. It is also making more profit than anyone else (£270m). Although this looks an unassailable position, one slight weakness is its limited support services offering outside the infrastructure sector.
A potential source of strength is its dependence on the PFI market, which makes up about 30% of its valuation, the highest percentage of the top 10 contractors.
Balfour Beatty is in the right areas of the public sector too, such as rail, energy, including nuclear, and health.
Another positive is that 25% of its revenue comes from the US market. The firm also has plenty of cash on the balance sheet. In a July trading update, it said it had average net cash of £200m for the first half of 2009.Security of public sector work 5/5
PFI business 5/5
Strength overseas 5/5
Strength of support services 4/5
Debt position 5/5Overall rating 4.8Carillion This contractor’s main vulnerability is the debt pile it accumulated during its takeovers of Mowlem and Alfred McAlpine. Analysts are not overly worried about this, though – the firm has cut its debt from £226.7m in December 2008 to £150m now. This was achieved by selling its IT business and two investments in PFI projects. Still, it does leave it weaker than debt-free firms. Carillion has a substantial business in the UAE, which has been severely hit by the recession, yet it has not had the payment problems other UK firms are seeing. This, one analyst says, is “a reflection of who their partner is (Al-Futtaim Group) and who they work for. Over there, if you do government work and your partner is well connected, you’re much better off”.
Carillion has a decent PFI business, which is responsible for about 20% of the firm’s valuation and should stand it in good stead during the recovery. Its public sector business is also active in the right sectors: rail, nuclear and waste. Its highways business could be a bonus, too, as it specialises in maintenance.
One potential obstacle to recovery is that it has pulled out of Mowlem’s regional businesses. Kevin Cammack, analyst at Cenkos, says: “Regional business is getting squeezed, so in the short term this is good. But longer term it might have enabled it to win the big support services contracts that the likes of Kier and Galliford Try pick up.”Security of public sector work 5/5
PFI business 5/5
Strength overseas 4/5
Strength of support services 3/5
Debt position 2/5 Overall rating 3.8Laing O’Rourke This firm, arguably the UK’s most successful contractor over the past 10 years, still has some potential worries. In its overseas business, it is well placed in the Middle East through it is joint venture with top Abu Dhabi developer Aldar, but it has been hit by a slump in workload – in January the joint venture made 320 redundancies in the UAE.
However, the firm has been aggressively chasing work elsewhere. For instance, it has hired former Crossrail boss Doug Oakervee to lead its drive in the Pacific Rim and it has a significant business in Australia, where forecasters are talking about recovery.
In the public sector, Laing’s work is something of a mixed bag – it operates in health and education, where the future looks shaky, but it also in the safer sectors, like rail and energy, including nuclear. It recently won two contracts to construct power stations at the Isle of Grain in Kent and Staythorpe in Nottinghamshire. It is a major PFI player, with projects including the £1.1bn Barnsley Building Schools for the Future (BSF) scheme and a strong track record on Procure 21.
It offers a range of steady support services, too – for instance, through Crown House Technology Services, which delivers IT, heating and ventilation systems. Yet Cammack believes it would be better placed if it had more non-traditional operations.Security of public sector work 2/5
PFI business 5/5
Strength of overseas business 4/5
Strength of support services business 3/5
Debt position 5/5 Overall rating 3.8Morgan Sindall Morgan Sindall has pushed Kier out of fourth position in this year’s rankings. Its main strength is its diversity: it undertakes fit-out, affordable housing, infrastructure, PFI and support services work, and this means it is well placed to push resources at the markets that recover first.
On the other hand, it relies on the public sector for 70% of its work, which could be a weakness later on. This is balanced somewhat by its strength in infrastructure, which is the sector most likely to hold up, and it is not heavily dependent on Crossrail.
Its other main weakness is its exposure to the office fit-out market – its Overbury subsidiary does about a quarter of the work in London. This could be a problem since private sector fit-out will probably be the last part of the industry to recover. As one analyst says, “Morgan Sindall are back-end-loaded.” Another potential weakness is the firm’s limited overseas presence – it only operates in Europe, through its Morgan Professional Services subsidiary and mainly for pharmaceutical clients.Security of public sector work 3/5
PFI business 4/5
Strength overseas 2/5
Strength of support services 5/5
Debt position 5/5 Overall rating 3.8Kier Although it’s the fifth biggest contractor, Kier was only 12th in the profit table this year (£63.4m on £2.4bn turnover for the year ended June 2008). But with £90m of cash in the bank, it is wonderfully positioned for the recovery, according to Alastair Stewart, an analyst with Investec.
John Dodds, Kier’s chief executive, puts the firm’s strength down to its geographical and sector diversification: “We probably have the best regional coverage of all contractors and we are on a wide range of frameworks.”
In both the public and PFI sectors, the firm has a healthy spread of work. And it is in some of the sectors with the best potential, including nuclear and waste. It was recently chosen by AWE as one of two contractors that will develop a portfolio of work at the Aldermaston nuclear research centre worth £200m and it is preferred bidder on a waste treatment plant for VT Group.
Stewart says: “They are strong in infrastructure and are quite defensive, having plenty of long-term contracts that will give them a steady income stream.” He also likes the firm’s regional business, which should put it in line for further long-term support services contracts, especially if we do see local authorities outsourcing more.
Kier has some international operations in the Gulf, Caribbean and eastern Europe, which could prove fruitful if these regions were to recover faster than the UK – and Dodds plans to beef them up.
The firm’s housing business (10% of 2008 turnover) has been a weakness recently, but Kier appears to be diversified enough to offset this.Security of public sector work 5/5
PFI business 5/5
Strength overseas 4/5
Strength of support services 5/5
Debt position 5/5 Overall rating 4.8

Housebuilders Berkley’s riding out the storm

Barratt With a £3.6bn turnover and profit of £137m for the year to 30 June 2008, Barratt’s figures look reasonable, yet City rumours are swirling about the firm’s £1.3bn debt. Robin Hardy, analyst at KBC Peel Hunt, says: “There’s no way this firm can trade its way out. They will have to come to market and beg for money and it feels like its shares are being puffed up ready for a rights issue.”
Barratt’s monster debt – due in part to its £2.2bn acquisition of Wilson Bowden at the height of the boom – will restrict its ability to buy land, ramp up production and boost marketing resources.
It also has a short landbank, which could be a problem when combined with its indebtedness – it will be tough to borrow money to buy more land, once its current land runs out.
Mark Clare, its chief executive, plans to maintain Barratt’s relationships with smaller subcontractors and large materials suppliers. He is also dipping a toe into the land market. “Across the country we’re buying 50-70-unit sites,” he says. These have low upfront costs and can be built on and sold quickly. 
As for the sales effort required to cash in on an upturn, Barratt has closed 100 of its outlets in the past year, but that still leaves it with 420 and Clare says he is planning to open 80 outlets over the next year. It has a good website and uses more modern marketing methods than many other housebuilders.
As for Barratt’s management, Hardy argues that Clare is doing a good job in tough circumstances, and that his often-cited lack of previous experience of housebuilding isn’t an issue. Other analysts say they would like to see more innovation, including more off-site construction and the use of business models where the housebuilder does not buy the land but instead acts like a contractor. Debt position 0/5
Quality of landbank 2/5
Quality of the management team 3/5
Strength of marketing muscle 5/5Overall rating 2.5 Taylor Wimpey The recovery can’t come soon enough for Taylor Wimpey which, as noted above, ended its financial year £2bn in the red. In the circumstances, it’s probably little comfort for chief executive Peter Redfern that his company is at number five in our combined league of housebuilders and contractors, and the biggest housebuilder in terms of turnover (£3.5bn).
And yet Tony Williams, founder of independent researcher Building Value, says he believes that when the market recovers, Taylor Wimpey will be able to take advantage of it. “It’s a bit creaky but its debt is dropping away and it’s a selling machine, essentially, so it will be okay.”
Taylor Wimpey also owns a good amount of land but timeframes are short. This will be a weakness because its heavy debts mean it will struggle to borrow money.
Despite its debt, which stood at £1.5bn when refinancing talks were finally concluded in May, no analysts expect the firm to fail. Yet none believe it will ever return to its previous dominance, either.
Hardy is concerned about Taylor Wimpey management’s belief that the market for off-plan sales will return. “People aren’t going to buy something before it’s built when they’re worried about losing their jobs.” He would also prefer the firm to have a boss dedicated to UK operations – Redfern, he says, “is just too busy, he can’t run both the US and UK at once”.Debt position 0/5
Quality of landbank 2/5
Quality of the management team 2/5
Strength of marketing muscle 4/5 Overall rating 2
Persimmon With £1.75bn turnover, Persimmon is the third biggest housebuilder in the Top 150. Unfortunately, it made a loss of £780m, second only to Taylor Wimpey, and it too is hampered by debt, though not as much as Barratt and Taylor Wimpey. It reduced its debt level from £906m in June last year to £495m this year and said it remains on track to hit its £450m target by December.
However, Cammack says it is in need of “an equity boost”. He says that although Persimmon has a decent-sized landbank, whose average length is five years, some land is longer – up to 10 years – but some is only two years. “They are likely to need to borrow capital to move fast and start rebuilding,” he says.
Hardy would have liked Persimmon’s management to have made more use of the zero-carbon homebuilding capacity it gained through the £643m acqusition of Westbury at the end of 2005. “There’s a good future in zero carbon and they should be building factories that can churn out zero-carbon homes in four weeks.” He is equally critical of the management’s decision in 2001 to sell the timber frame business of another of its acquisitions, Beazer.
Persimmon’s ability to step up its sales and marketing effort – the firm has cut more than 2,000 jobs since the credit crunch began – would also be considerably enhanced by a cash injection.Debt position 1/5
Quality of landbank 2/5
Quality of the management team 2/5
Strength of marketing muscle 3/5 Overall rating 2Bellway Mike Foster, an analyst at Fairfax, made Bellway a buy in his July research note. This is because debt is not an issue for the company and it has a “decent but relatively short landbank” – about five years’ worth, and in good areas.
Its results are healthy, too – for the year to June 2008, it made £34.7m pre-tax profit on a turnover of £1.1bn.
If analysts have any criticism of Bellway, it is that the firm’s management is relatively unexciting. One says: “It’s ploughing a clean furrow, but it’s a bit boring, I don’t see any exciting new innovations coming from Bellway.”
The same goes for its marketing; the firm would benefit from a better website and less reliance on printed material. Hardy would prefer to see the firm using more third-party websites to generate leads. “A site like Right Move tells you there are 60 people in Kettering looking for a four-bedroom home – paying for that information is worth more than just sticking an ad in a newspaper.”Debt position 5/5
Quality of landbank 5/5
Quality of management 2/5
Strength of marketing muscle 3/5 Overall rating 3.75Berkeley Group Berkeley’s trump card in the recovery will be the strength of its brand. Analysts love the fact it that is still putting out glossy ads and has a slick website. “It is playing the confidence card and it’s really differentiating itself with this in the eyes of the financial market and the public,” says Williams.
The firm also has the strongest balance sheet of the top five housebuilders, with £284m of cash, with which it plans to buy land at the bottom of the market to boost its healthy landbank, which is neither overly short nor long. And it is second in our profit ranking, having made £194m before tax on £991m. It has good scope to borrow if it wanted to ramp up its activities to pounce on opportunities emerging in an upturn.
When it comes to management, the fact that despite recently moving up to the chairman’s job Tony Pidgley is expected to remain hands-on bodes well for the firm. His ability to spot trends and buy and sell and land is well known.Debt position 5/5
Quality of landbank 5/5
Quality of the management team 5/5
Strength of marketing muscle 5/5 Overall rating 5The Top 150 tables are located below as pdf files …

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Postscript

Tables compiled by Martin Hewes

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