Industry Watch. Construction November 2018

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1 Industry Watch Construction November 2018 Company Watch, Centurion House, 37 Jewry Street, London, EC3N 2ER (0) info@companywatch.net Registered in England and Wales No

2 Industry Watch - Construction Organisations around the world rely on Company Watch s industryleading financial analytics, such as the H-Score and TextScore, to drive their credit and procurement risk processes. Our scores are trusted by banks, corporates, investment houses and public sector bodies to manage their exposures: by providing a transparent drill-down to the factors driving our analysis, and the tools to stress-test our scores, we enable our clients to take evidenced-based decisions and justify these to key stakeholders within their organisations. If you would like to find out how the Company Watch platform and analytics can support your credit and procurement processes then please contact us. Regards Jo Kettner CEO, Company Watch November 2018 With the H-Score and TextScore predicting over 92% of global quoted company insolvencies in advance, it is the risk management tool of choice, providing actionable intelligence in an uncertain world. As part of our ongoing analysis of the market place we monitor the performance of industry sectors within the economy and model the impact of internal and external events on various sectors. These results are included within our Industry Watch updates. Our latest Industry Watch looks at the Construction sector, in the light of Carillion.

3 Analysis of the Construction sector The construction sector is a multi-faceted industry, including house builders, major contractors and civil engineering. Since the spectacular collapse of Carillion in January 2018, there has been a heightened interest in the performance and financial sustainability of the major players. Company Watch has reviewed the construction and house building sector to track the overall state of the industry. The main finding was that the average H-Score has slipped to 42, down from 43 in However this figures falls even further for smaller companies. For contractors with assets between 21k and 50k the average H-Score is 36, while those with less than 20k of assets the average H-Score is 30, only 5 off the warning zone. There are over 65,000 companies who are in the warning area reflecting 39% of the industry; and again when you look at small companies 46% with assets between 12k and 50k are in the warning area, and a massive 57% of companies with less than 20k of assets are in the warning area. It is interesting to note that 18,000 companies are zombies with negative balance sheets, reflecting an industry which is facing severe challenges. These include intense competition and the impact of Brexit causing clients to delay final decisions. Debt does not appear to be a major issue for most companies, the overall gearing is only 36%, and is mainly focused among the bigger companies. Yet construction insolvencies are on the rise, with a 17% increase when compared to Q Overall construction insolvencies account for 18% of UK failures however the sector is only 6.1% of UK GDP, making a construction firm three times more likely to fail. The sector is seeing activity though, construction output has risen consistently every month since April 2018, although the new contract starts have almost stalled. Within the industry the house builders are seeing growth, with NHBC registrations in Q the highest recorded since This particularly true in London where a strong housing market is continuing thrive. The industry is also seeing a increased profitability for the larger companies. The profit before tax rose to 17.1% (from 11.5% three years ago), although gross margins had a more sedate suggesting that profitability has been achieved through cost cutting rather than an increase in sales.

4 While profitability for larger companies has grown to 17.1%, 57% of small companies are in the warning zone

5 Review of the key players The construction industry is split, with very different stories and scenarios separating the large from the small. The top 20 companies have increased their sales and assets over the past five years. The total sales have increased by 64% and the total assets have increased by 48%. Total Sales and Total Assets for the combined top 20 companies in this industry increased over a 5 year period (sales by 64% and Total Assets by 48%). The larger companies are not immune to the challenges within the sector. Four of the top 20 companies have H-Scores that put them in the warning area. The placement of the top companies are shown in the image on the right. How construction companies rank using the H-Score rating High Low Persimmon plc Barratt Developments plc Taylor Wimpey plc Bellway plc Crest Nicholson Holdings plc The Berkeley Group Holdings plc Bovis Homes Group plc Bloor Investments Limited Redrow plc Skanska UK plc Wates Group Limited Mace Limited Balfour Beatty plc Morgan Sindall Group plc Galliford Try plc Hardwicke Investments Limited ISG plc Kier Group plc Interserve plc Laing O'Rourke plc H-Score warning area

6 The H-Score The H-Score measures a company s financial health. It is derived from a company s published financial results and quantifies how closely the accounts resemble those of companies which subsequently failed. Displayed graphically over five years, on a scale of 0 (weakest) to 100 (strongest). Companies with an H-Score of 25 or less are placed in the Warning Area. Not all companies in the Warning Area will fail, however, of the companies that do fail, the vast majority were in the Company Watch Warning Area prior to collapse. The H-Score analytics look at a company's financial position from a number of aspects including profit management, working capital management, liquidity, and how the assets are funded. To find out about subscribing to Company Watch please contact us on +44 (0)

7 Company Watch Centurion House 37 Jewry Street London EC3N 2ER +44 (0)