Glenigan Customer Newsletter

Glenigan Insight 10th November 2009

Welcome to Glenigan's weekly customer newsletter that brings you comment on major industry developments and news updates from the past week.

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Northern Ireland Update

Featured Region: East of England

Featured Sector: Industrial

Project News
Framework consultants appointed
Morgan Ashurst awarded composting contract
Consultants sought for framework contract
Contractors sought for hospital refurbishment
Marshall awarded sports stadium contract
Tenders invited for school extension

Company News
'Cautiously optimistic' Galliford Try moves to significantly grow housing arm
NG Bailey: CEO departure was pre-planned
Morrison eyes up acquisition targets
Rok trading on target after winning 48 jobs this year worth £700m
WYG to be owned by banks
Aecom targets major projects work

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Northern Ireland Update

Increased public sector activity over the last year has helped has softened the decline in construction activity in Northern Ireland. Official statistics released last week reveal that construction output in Northern Ireland during the first half of 2009 was 9% down on a year ago. This compares to a 15% decline in construction output for Great Britain.

Glenigan recorded a 19% increase in the value of underlying planning approvals during 2008 as strong public sector spending, combined with previous optimism over the business outlook, led to an increase in approvals across a range of sectors. Whilst planning approvals have subsequently fallen back sharply, previously approved schemes have progressed to site and bolstered workload. For instance, the Northern Ireland Government has significantly increased capital spending in the education sector and the current year has seen a number of school projects starting on site.

The increase in public sector work is evident in the output data, with new social housing output during the first six months of 2009 a third higher than ago and public non-residential work, such as health and education projects, rising 13%. In contrast new private housing output fell 31% over the same period and new commercial work was 34% lower.

Unfortunately the deteriorating economic environment and the recent dip in detailed planning approvals will increasingly impinge on new project starts over the coming year. We expect the flow of project starts to slow during the closing months of 2009 and during 2010. This will further dampen construction activity over the next 18 months as the recent batch of public sector schemes is completed.

Featured region: East of England

Recent performance
Construction starts in the East of England have fallen sharply. The region had a year-on-year fall of 44% in the value of underlying construction starts during the fourth quarter of 2008, and would have endured a much shaper decline but for a surge in civil engineering work. Many sectors have experienced significant falls in both the underlying value and number of projects starting on site, with offices, private housing and retail among the hardest hit in the region. The fall in private housing has been particularly damaging. In 2006, the sector accounted for 35% of the value of underlying construction starts in the East of England, by the first quarter of this year it had fallen to 17%. During the first half of this year, the value of underlying private housing starts stood at £184 million, down from £438 million during the same period a year ago.

One bright spot for the East of England during the fourth quarter of 2008 was the start on site of construction work to expand Felixstowe, the UK’s major container port. The project will provide an immediate boost to civil engineering activity. If, as expected, the port expansion helps to boost trade at Felixstowe, then it should also act as a catalyst for further investment in construction projects in other sectors, although this will take time to feed through to projects starting on site.

Project starts remained weak during the first quarter of 2009, running at half the level of a year ago. However, project starts during the second quarter of 2009 were boosted by sharp increases in education, health and social housing schemes. The education and social housing sectors remained firm during the three months to August, with education boosted by a £50 million project for University Campus Suffolk. The increase in public sector work has halted the year-on-year decline in the value of underlying projects, with starts during the three months to August 16% up on a year ago.

Prospects
The East of England is being hit particularly hard by the fallout from the credit crunch. Construction prospects are not expected to substantially improve in the region near term, despite the recent pick up in public sector projects. The region experienced a major contraction in the value of underlying construction starts during the first quarter of 2009 and, whilst the recent pick up in project starts is encouraging, we still expect project starts to remain under significant pressure during the remainder of 2009 (see table below).

During the six months to June 2009, the underlying value of planning approvals was 22% down on a year earlier, in large part due to sharp declines in retail, infrastructure and utilities scheme approvals. However, approval for two significant education projects during July help to counter the weak underlying trend, leaving the value of planning approvals during the first seven months of 2009 2% up on a year ago. Unfortunately, having secured planning approval, the lion’s share of the work associated with these projects has been placed on hold.

Private housing construction will be impacted by the poor prospects for the region’s property market. According to Halifax, the difference between the ratio of average house price to average earnings, and the ratio’s historical level in East Anglia, was one of the largest differentials in the country in the second quarter of 2008. House prices have since fallen sharply in the region, bringing the ratio much closer to its historic levels.

The dramatic fall in the house price to earnings ratio may suggest that housing affordability has improved in the region. However, falling house prices and expectations of further price falls to come will deter first time buyers. This, together with the problems in the wider economy and constraints in accessing finance, means that it will take some time for private housing construction to recover in the region. Unsurprisingly, the value of underlying planning approvals for private housing remains weak, being 60% lower during the first seven months of 2009 than a year earlier. This is expected to remain a constraint on private housing starts in the region.

Glenigan estimates that the value of underlying construction starts will fall by 19% this year, with the value of starts in the region expected to return to positive growth in 2010.

Featured sector: Industrial

Recent performance
Four years of sustained growth in industrial construction activity came to an end during the second half of 2007. Sector output had been underpinned by strong growth in investment in warehouse facilities to meet demand from manufacturers, retailers and the logistic sector. In particular, strong demand for large warehouses of 10,000m² and over had helped fuel sector growth despite an overall rise in available floorspace.

However, with newly built, speculative developments accounting for a growing proportion of available industrial space, the flow of new projects starting on site has slowed over the last 18 months. The overhang of vacant premises has continued to rise; King Sturge estimates that the availability of new industrial property jumped 26% over the year to December 2008 and accounted for 15.5% of total availability. Over the same period, the amount of speculatively built floorspace under construction fell by 85%. The downturn was reflected in official figures, with warehouse-related output falling by a third during 2008 and being 39% down on a year earlier during the first quarter of 2009. The decline in output follows sharp falls in new orders for warehousing projects over the last two years. The slide has gathered momentum during 2009. Output during the first half of this year was 39% down on a year ago, while a halving in new orders over the same period points to a further decline in sector activity over the coming months.

In addition, industrial construction has suffered from the poor outlook for the UK’s manufacturing sector. The slide in manufacturing output accelerated during the opening months of 2009, with manufacturing volumes during the first quarter falling 5.6% on the previous quarter and standing at 13.5% down on a year earlier. While recent reversals in energy and commodity prices offer some relief to manufacturers, the benefit for manufacturers’ margins will be muted by weakening demand and flat output prices. UK manufacturers’ gross rate of return during the third quarter of 2008 stood at 6.8%, down a fifth on a year earlier.

Unsurprisingly, businesses’ confidence has fallen sharply, with recent CBI surveys recording manufacturers’ output expectations at their lowest level since 1980. Against this background, manufacturers have deferred planned investment. Official data covering manufacturing shows that the sharpest cut to date has been on vehicles, with first quarter expenditure running at half the level of a year ago. In contrast, the fall in manufacturers’ expenditure on other capital equipment was only 10.5%, while investment in new buildings rose over the same period. The rise in investment in new buildings is likely to relate to investment decisions made prior to the economic downturn given the typically longer lead time with such expenditure and, accordingly, investment is likely to fall back sharply over the coming months.

Overall, these factors have led to dramatic falls in the value of underlying construction starts. During January to August 2009, the value of underlying industrial starts fell 48% year-on-year.

The North West, traditionally a strong region for industrial construction, saw the value of underlying starts fall by 19% last year, while project starts also fell across the Midlands, Wales and Yorkshire & the Humber. Nevertheless, the Midlands and the northern regions of England collectively accounted for over half of all project starts by value. The sharp fall in industrial starts during the first eight months of this year, has again hit the UK’s industrial heartland especially hard.

Prospects
Industrial construction is set to come under further pressure during the remainder of this year. Manufacturers, faced with weak domestic and overseas demand and surplus capacity, will remain reluctant to invest. In addition sluggish consumer spending is expected to curb retailers’ appetite for large distribution facilities. The uncertain economic outlook and the limited availability of debt finance will continue to restrict the flow of new speculative developments, with developers continuing to shelve planned schemes.

Against this background, the dwindling number of projects in the pre-construction pipeline has prompted us to revise down our forecast for project starts during the closing months of 2009. The value of underlying planning approvals has significantly weakened, falling by 56% year-on-year during the first half of 2009. Industrial starts will remain weak during the second half of this year and are forecast to be down some 49% during 2009 as a whole (see table below).

The outlook for 2010 and 2011 is potentially more encouraging. On the upside, in time, UK manufacturers should begin to benefit from improved competiveness following Sterling’s recent sharp falls against the Euro and the US Dollar. This should help temper the impact of the general weakening in UK and global economic growth. In addition the current expansion of UK port facilities should act as a spur to develop accompanying distribution facilities. Similarly, planned investment to remove freight bottlenecks on the rail network, coupled with growing road congestion, will encourage investment in new rail-connected distribution facilities.

Accordingly we anticipate a sustained recovery in the value of underlying industrial project starts. However, the forecast rise in project starts is from an extremely weak base and the value of starts in 2010 is still forecast to be some 30% below 2007 levels. Furthermore, given the current economic climate, there is a significant risk that projects will be delayed or abandoned, hampering the sector’s anticipated recovery next year.

Project News

Framework consultants appointed
The Royal Borough of Kensington & Chelsea has awarded its' framework consultancy service contract. The consultants are Project Centre Ltd, Jacobs, Halcrow, Hyder Consulting, Atkins and MVA. The contract started on the 1st October 2009. Works for the £8 million contract will include general services, transport planning, traffic engineering, highway engineering, structural and civil engineering, asset management, drainage engineering, utilities engineering, street lighting engineering, bridge engineering, rail engineering, urban design, landscape architecture, technical administration and CDMC.
Project ID: 09019431

Morgan Ashurst awarded composting contract
Norfolk Environmental Waste Services Ltd has appointed Morgan Ashurst Ltd to carry out the construction of the £4 million waste composting facility for Crane & Sons Farm in Norwich. Construction is to commence January 2010 and once complete will become a kitchen/food waste composting operation which will be able to process up to 45,000 tonnes per year.
Project ID: 08394668

Consultants sought for framework contract
Clients WAG DRAH, the historic environment service of the Welsh Assembly Government, is currently inviting applications to tender for civil, structural and mechanical & electrical consultants for a framework contract. The client is responsible for preserving and promoting 127 historic monuments in the care of the Assembly. The project has been advertised in the OJEU under reference numbers 2009/S 212-306416 and 2009/S 212-306415.
Project ID: 09344703

Contractors sought for hospital refurbishment
Applications to tender are currently being invited by Clients Gloucestershire Primary Care Trust for a scheme at Wotton Lawn Hospital, Horton Road in Gloucester. The £1 million scheme will see the remodelling of inpatient units including removal of known ligatures and ligature points. The project has been advertised in the OJEU under reference number 2009/S 212-305581, and works are expected to start on site Spring 2010.
Project ID: 09344700

Marshall awarded sports stadium contract
Marshall Construction has been awarded the main contract for the construction of a sports stadium at New Loch Park in Carluke. The £2.8 million development for South Lanarkshire Council has been designed by The Miller Partnership and will also provide an eight-lane, 400 metre polymeric track complete with long jump pit, high jump quadrant and steeple chase pit. Inside the track there will be a newly laid 3rd generation synthetic football pitch. Works are due to commence in December, 2009.
Project ID: 09113923

Tenders invited for school extension
Tenders are currently being invited for the construction of a sixth form learning centre at Dauntsey's School in West Lavington, Devizes. The £500k scheme has been designed by NVB Architects Ltd. Tenders are due to be returned November 16th, with works due to commence 21st December, 2009.
Project ID: 09344726

Company News

'Cautiously optimistic' Galliford Try moves to significantly grow housing arm
Galliford Try is pressing ahead with plans to deliver significant growth in its housebuilding business over the next three years after raising £119 million through its rights issue and adding 800 units to its land bank since the start it its financial year.

In an interim management statement for 1 July through 5 November the group, which said it was now "cautiously optimistic" on the immediate outlook for housebuilding, revealed it had also managed to boost the order book for its construction division to £1.75 billion.

Galliford Try said: "The rights issue has given us the resources that, when added to our organisational strength, will enable us to deliver our strategic expansion plan.

"Good progress is being made on bringing land acquisition opportunities to fruition. Since the start of the financial year we have secured a number of sites across our areas of operation that meet our criteria, adding 800 units to the landbank. Positive progress is also being made by our affordable housing and regeneration business, with both further direct grant awards and £16.8 million of Kickstart funding now secured from the Homes and Communities Agency's housing stimulus package."

The group said the anticipated five-year framework renewals in its water business were now coming through and, since the start of our financial year, it had secured its positions on the £2 billion capital works framework for Scottish Water and the £400 million capital works framework for United Utilities.

The firm said: "The remaining renewals expected around the end of 2009."

However, with 81 per cent of its construction order book coming from the public and regulated sectors, Galliford Try acknowledged future constraints on public expenditure would add to the competitive pressures across the industry.

In the statement, the company also said it was still considering grounds for appeal after being fined £8.33m by the Office of Fair Trading in respect of three instances of cover pricing that took place in the early 2000s.

NG Bailey: CEO departure was pre-planned
NG Bailey chief executive Mark Andrews left at the end of a pre-planned six year term, the company said today as it also revealed it was going through a restructuring process to deal with the recession.

There was speculation that Mr Andrews, who will leave at the end of the month, had been a victim of cost-cutting at the group. The company released two statements from acting CEO Chris Newton and from Mr Andrews.

Mr Newton said: "Mark worked for NG Bailey for nearly six years, a term envisaged at the start of his tenure. During that time Mark grew the business from a circa £400m turnover company to one that last year saw sales rise to just over the £600m mark. He was instrumental in creating and implementing our 'For Life in Buildings' strategy, which will continue to drive our business forward.

"Over the last year, Mark has led a right-sizing programme, helping us to reposition the business in line with the market recession we are all facing. With this programme in place it therefore seemed like an appropriate juncture for Mark to pass on the overall leadership of the company." Mr Newton said the company's recent results, in which it revealed a £10.8m loss, had been "disappointing". I would like to add that the company, although having reported disappointing results earlier this year, is in an ideal place to weather the current economic storm - with a balance sheet of which many would be envious.

Departing CEO Mr Andrews said: "I will be leaving NG Bailey at the end of the month. Following the implementation of a right-sizing programme, to bring the business in line with what the market is demanding, the decision to hand over the reins at this juncture was mutually agreed. "I will be working with Chris Newton over the next couple of weeks to ensure a smooth transition for him in his new role as acting CEO. I am currently considering a number of options in terms of my next role, which I will provide an update on in due course. "I wish Chris every success as acting CEO and to NG Bailey for its continued leading position in the industry."

Morrison eyes up acquisition targets
Morrison Utility Services is targeting a significant acquisition after a year in which its turnover passed the £500 million mark. Chief executive Charles Morrison said the company had formed a mergers and acquisitions team to identify possible targets. Detailed analysis has been carried out on firms with turnovers of up to £50m and experience in the regulated sector.

Several targets have been identified, but bosses are delaying an acquisition until after watchdogs Ofwat and Ofgem have announced their five-year funding plans from 2010 for the water and energy industries. Both are expected to be announced in December and will go some way to determining how much money water and energy companies have for capital spending. Mr Morrison said: "Funds are available for a bolt-on acquisition. We are looking for something that complements what we have already got. "We are ready to press the button depending on what happens with Ofwat and Ofgem."

Morrison's turnover for the year to 31 March 2009 totalled £500m, the firm revealed this week. This represents a 1.5 per cent increase on the previous year's £492.7m. But the firm's pre-tax profit dropped 55 per cent to £9.2m in that time. Morrison's order book currently stands at £1.35 billion, which would rise to £2.5bn if all possible contract extensions were achieved.

All Morrison's work is in the regulated sector, with 37 per cent of its turnover coming from gas, 29 per cent from electricity, 26 per cent from water and 8 per cent telecoms. Mr Morrison said the firm's strength lay in its client relationships and long-term contracts - its turnover is garnered from just 14 clients. He said: "It is tough at the moment, but to an extent we have had a softer landing than some."

He added: "If you were a broadly based contractor with a £500m turnover you would probably have more like 40 or 50 clients. "Our contracts allow us to know what resources we will need. We know our contracts will be over five years or so. If you can get a contract for five years it is a privileged position to be in." But having so few clients means retention is essential, he said. Morrison has its own training school to ensure its 3,200 staff meet qualifications required by its clients.

Following recent demands from clients, a customer service element is being built into training. Ofgem has introduced quarterly league tables on customer service experiences related to workmen. Mr Morrison said a customer focused culture for contractors was beginning to be perceived with the same level of importance as safety. As a result Morrison is now a member of the Institute for Customer Service.

Rok trading on target after winning 48 jobs this year worth £700m
Rok has secured £700 million so far this year after securing 48 new contracts since January, the firm revealed. In a trading update for the period from 1 July 2009 to 4 November 2009 Rok said it is trading in line with projections and that is full year results are in line with expectations. Rok's total forward revenue under secured orders and long term framework agreements now stands at £2.1 billion, level with the previous year.

] Secured and visible revenues for 2010 are now some 80 per cent of our forecast revenues. The future framework pipeline is also strong at £1.6 billion. From 2010, Rok will be organised around four national business teams:
Maintenance (to include improvements)
Social Housing (to include new build and planned repairs)
Plumbing Heating & Electrical (PHE)
Construction

The firm said: "This structure will bring further efficiencies in costs and greater opportunities for growth through a consistent national approach. "Having taken decisive action over the past year to align our cost base with expected levels of revenue in an increasingly challenging operating environment, our resulting business mix puts us in a strong position to resume growth as the economy recovers. "With a high proportion of our future revenues underpinned by long-term agreements with customers, we remain confident about the Group's prospects for the year and beyond."

WYG to be owned by banks
Consultant White Young Green (WYG) said that it was likely to downsize as it refocused on fewer markets. Chief executive Paul Hamer confirmed that turnover was likely to drop in the short-term and said he could not rule out further redundancies. WYG shed around 800 jobs earlier this year as it struggled to comply with banking covenants (NCE 2 July).

Last week the firm confirmed that it is to stop trading its shares on the London Stock Exchange as it was undertaking a debt-for-equity swap that will make banks its majority shareholders. The firm has debts of up to £100M and made a loss of £123.7M in the last financial year after accounting for £141M of exceptional items. "Banks will be the largest shareholder." Paul Hamer, WYG

The proposed refinancing agreement will result in WYG's banks exchanging approximately £50M of debt for a 60.5% share in the company. Remaining shares will then be traded on the AIM market. A new employee trust will own 24.5% of the remaining shares and existing shareholders 15%. "Banks will be the largest shareholder," WYG chief executive Paul Hamer told NCE. "They have bought into the management team and our strategy. The WYG board will still be making strategy," he said, adding that an investor director will sit on the board, representing the investors' interests. This role will initially be held by non-executive chairman Mike McTighe.

"In the last few months, we have seen some heavy restructuring," said Hamer. "We are a large company and we want to tighten our focus. We want to do less but do it better." Paul Hamer, WYG "We are a large company and we want to tighten our focus. We want to do less but do it better, shifting focus away from some markets while focusing on other markets aggressively. It is likely we will get smaller. "Our revenue is likely to remain flat or drop slightly in the short-term and improve going forward."

WYG announced a modest pre-tax profit £12M in its annual results, before exceptional costs of £141M. Around half of the £141M relates to the writing off of goodwill relating to acquisitions. Around £20.5M was to cover bad debts, unpaid bills and professional indemnity claims. A further £20M went on the closure of offices on which the lease still had to be paid and £9M was spent on redundancies. "We have cleared legacy issues and are getting into a good shape going forward," said Wilton. Transferring the company listing from the London Stock Exchange to AIM is still subject to shareholder approval.

Aecom targets major projects work
Consultant Aecom's UK and European project management arm this week said it was gearing up to take on Bechtel and other major players for major projects work. Its new European director of programme management Andie Harper told NCE that transport and infrastructure along with energy and the environment would be key sectors for the firm.

Harper has joined the firm from Tube upgrade contractor Metronet where he guided it out of administration and into Transport for London's control. "There are considerable opportunities, both in the European Union and United States." Andie Harper, Aecom

"Aecom is looking to develop its programme management capability, and I bring my expertise from Transport for London and London Underground," he said. Although he would not mention specific projects, he said he would be targeting "transport and infrastructure â¿' my area, but also energy, environmental and nuclear projects going forward". "There are considerable opportunities, both in the European Union and United States," he said.

Harper was managing director at London Underground's Infraco JNP from 1999 to 2002 prior to the start of the London Underground PPP. He was also project director for the Edinburgh Tram project and was programme director for Washington Group International, a large US construction company.

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Allan Wilen Allan Wilén, economics director, Glenigan
Allan joined Glenigan to head the development of the new market intelligence service for Glenigan subscribers. Allan has over twenty years of experience analysing and forecasting the UK construction industry. He was previously Economics Director at the Construction Products Association and responsible for all economic aspects of the Association’s activities. This included briefing members, the media and Government on the commercial implications for the construction industry of the changing economic environment and the delivery of the Government’s expenditure plans. Allan was also responsible for developing the wide range of regular economic reports published by the Association, including its Construction Industry Forecasts, which provide members with timely and valuable market intelligence.

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