Top 150 contractors and housebuilders 2014

The last 12 months have seen an about-turn in the economic fortunes of the UK. Housebuilders have been in clover, responding to a recovery driven by government support in the form of Help to Buy and rebounding consumer confidence. But for contractors, the increasing new work coming in hasn’t yet fed through to their published figures. As far as their profit margins go, it may as well be mid-recession. The hard yards are still to come.

It’s no surprise then that Building’s annual Top 150 Contractors and Housebuilders tables, based on the most recently published figures from the sector’s biggest firms, shows housebuilders – particularly the listed variety – creeping up the tables, while contractors (with one or two honourable exceptions) are largely in stasis. Much of this change is simply cyclical, with contracting a lagging indicator of economic growth, while the housing market leads the charge. And there is no doubt contractors are winning more and more work. For example, Skanska UK this week said it is recruiting an additional 1,500 staff in the UK to deal with its predicted increased workload. So with some commentators suggesting the housing market may already be stuttering, and housebuilder share prices dropping in the past three months, contractors are desperately hoping that this is the point the tide starts to turn back to them.

For a full set of tables in interactive form click here

Overall, the 2014 Top 150 shows the turnover of the UK’s biggest housebuilders and contractors to have risen modestly by just over 2.5% in the last year, to £84.7bn. It’s not hard to see where the growth - what there has been of it - has come from: housing. The top 20 housebuilders alone account for nearly all of that rise, seeing a £2.4bn turnover increase, up almost 15% by pulling in a total of £19.2bn of revenue. In contrast, the top 20 contractors, while still much bigger overall than their housing counterparts with over £40bn in turnover, have seen revenue grow by just a few hundred million pounds. This is growth of just a fraction of 1%, despite the recovering economy.

And there’s no doubt who is making a return from all this business. The average pre-tax profit margin of the firms working as contractors is just 2.8%. However, for housebuilding businesses it is almost 10%, and for those quoted on the stock exchange it is more than 13%.
Hence the major changes in the order of this year’s Top 150 reflect this ongoing surge, with a third housebuilder (Persimmon) making it into the top 10. Barratt, the largest housebuilder by turnover, moves from sixth place to fifth; Taylor Wimpey, with turnover growth of almost 14%, leaps up from 10th to seventh; and Persimmon nudges forward from 11th to 10th (see page 31). Chris Millington, analyst at Numis, says: “This year of figures will be the best year of growth for housebuilders, because they’re comparing to the period before Help to Buy was launched. They’ll struggle to match it going forward.”

Alastair Stewart, analyst at Progressive Equity Research, puts it another way: “For housebuilders, we have got beyond the point where it is as good as it gets, and for contractors, we’ve got past the point where it is as bad as it gets.”

It’s no use filling our order books with problem jobs. We have to be as selective in a good market as we are in a bad market

Paul Chandler, Skanska UK

But, Millington insists, this doesn’t mean that the good times are over for housebuilders. Far from it, despite fears over increasing mortgage regulation and interest rate rises taking the steam out of house price rises. “Yes this’ll be the best year of growth, but will they go on to make higher revenues and profits? Yes they will,” he says. “They’re all predicting higher volumes, and margins improving on a combination of changing the types of homes they’re building and using more land bought after the recession at lower rates.”

“To start talking about this being mid or late- [housing market] cycle is premature. There’s potential for year-on-year growth to 2020.”

And while some are more pessimistic about the housing market dynamic, even they admit that whatever happens from now, housebuilders will report strong growth in 2014 figures simply from homes already pre-sold. Progressive Equity Research’s Stewart says: “It’ll take a while for any downturn to feed through to housebuilders’ profit and loss.”

The positive view is backed by Greg Fitzgerald, chief executive of Galliford Try, which made £639m in sales through its housebuilding business, Linden Homes, last year. “Yes some of the froth on the market has come off in the last couple of months, but this will just make the growth we expect more sustainable. Margins will continue to rise in housing, but we won’t necessarily do double-digit growth every year. I’m happy with 2-5% price inflation, it’s more sustainable.”

But Fitzgerald agrees that the cycle has now turned for the contracting side of his business. Galliford Try is one of the big success stories in this year’s Top 150, leaping up from 14th to eighth largest contractor (see page 41) on the strength of its acquisition this month of Miller Group’s contracting business (the numbers include Miller’s construction turnover on a pro forma basis). So there must be a reason why he is betting on a major construction acquisition, rather than expanding his housing business.

“I hope that this is the right point in the cycle to make the acquisition. It’s a reasonable assumption that this is the lowest point for contractors, with last year being the low point for margin and turnover.”

For housebuilders, we have got beyond the point where it as good as it gets, for contractors, we’ve got past the point where it is as bad as it gets

Alastair Stewart, Progressive Equity Research

This positivity is matched by Skanska, which rose by one spot in the Top 150 (see page 31) on the back of a 11.3% turnover rise to £1.22bn, and sees further growth ahead. Paul Chandler, executive VP for Skanska UK’s building division says: “We’ve done well in recent years in a number of different areas including infrastructure and utilities. But certain parts of the market that have been fairly quiet, such as London commercial building, are now picking up, and a number of very good opportunities are coming our way.”

Understandably, however, a return to more reasonable margins is the pre-eminent concern. “It’s no use filling our order books with problem jobs. We have to be as selective in a good market as we are in a bad market.” Key to this is working with suppliers in order to keep construction inflation under control. “Cost inflation is one of the things we’ve got our eye on. It comes down to how you’ve treated your supply chain during the last five years, and that’s how they’ll treat you over the next five years when things are good,” Chandler says.

The hangover of work bid at wafer-thin margins 18 months ago, and price rises from suppliers in the current market all adds up to mean that, despite the improving picture, contractors are unlikely to surge out of the blocks. “You won’t see much recovery in profit margins even this current year,” Stewart says. “You may see the cash profile improve as workload picks up, [but] margins will be poor for a while. It’ll be a couple of years still before growth starts to feed through.”

So while the picture is improving for the UK’s biggest contractors, they will have to wait a little bit longer before they start to challenge the housebuilders for turnover growth and financial performance.

For a full set of tables in interactive form click here