Major contractors’ results put promising sectors in the spotlight

The interim results of the major quoted public groups which appeared in August provided a useful guide to some of the more promising construction markets which are keeping the larger contractors busy. Growth in water-related work was one of the key factors behind an improved performance at Costain’s natural resources division, which has a £900 million order book. The firm says bid activity has now started under the next AMP7 programme with a number of clients seeking to develop business plans ahead of the five year period running from 2020. Meanwhile, the group’s work under AMP6 five year programmes for Thames Water, Severn Trent and Southern Water is progressing well and major projects where it is working include the Thames Tideway project and the Shieldhall Tunnel in Glasgow for Scottish Water. Growth in water-related work was one of the key factors behind an improved performance at Costain’s natural resources division, which has a £900 million order book. The firm says bid activity has now started under the next AMP7 programme with a number of clients seeking to develop business plans ahead of the five year period running from 2020. Meanwhile, the group’s work under AMP6 five year programmes for Thames Water, Severn Trent and Southern Water is progressing well and major projects where it is working include the Thames Tideway project and the Shieldhall Tunnel in Glasgow for Scottish Water. Glenigan data reflects the growing momentum of the AMP6 programme. Although the overall value of project starts weakened last year, this followed follows a surge of major project starts in 2015, when the current five-year investment cycle got underway. The value of underlying smaller water project starts for schemes of less than £100m tracked by Glenigan grew by 11% in 2016. The promising market for UK infrastructure in the UK stood out as a key theme in the latest results from the UK’s largest contractor, Balfour Beatty. The group stands to benefit from the Government’s strong infrastructure pipeline, notably High Speed 2 (where a Balfour Beatty VINCI jv won two contracts in July worth around £2.5bn), new nuclear power stations at Hinkley Point C and Wylfa, a third runway at Heathrow and smart motorways for Highways England. Indeed, more highways work has helped sustain Balfour’s £2.2 billion UK order book. In the first half, the firm opened a stretch of the M3 as a four lane smart motorway and it started work on widening the A14 between Cambridge and Huntingdon. The healthy prospects for the sector are reflected in Glenigan data showing approvals for underlying infrastructure starts in the 12 months to May 2017 rose by 42% and were boosted by a 16% rise in the second quarter. Balfour Beatty remains cautious on the outlook for the London commercial building sector where it has seen a slowdown in projects coming to market but is continuing to see growth across regional markets. The group’s regional business has been focusing on fewer, larger projects, reducing its exposure to contracts under £5 million and cutting the number of live jobs from over 400 to around 200 in the past 18 months. Today, the division is pursuing work across its core markets in aviation, defence, education, health, residential-led neighbourhoods, student accommodation and transport. Key contracts which Balfour Beatty has won over the past year reflect the relatively bright picture in the regions. They include the £200 million engineering campus development at Manchester University, a £179 million contract to build 2,000 new bedrooms for Sussex University and a £16 million enabling works contract for Network Rail for the redevelopment of Glasgow Queen Street Station. The latest results season also suggests a more selective approach is helping the major contractors re-build their margins. Balfour Beatty is on target to raise its UK construction operating margins to 2-3% by 2018. Meanwhile, Costain reported an operating margin at its infrastructure arm of 3.6% in the first half and says it is on target to achieve an ‘underlying blended’ operating margin of 4-5%.