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Market Research Bulletin: Mixed annual results from UK construction companies but many showing strong order books

CONSTRUCTION

  • The latest construction output figures published by the ONS indicate that output in Great Britain rose in January 2019. The seasonally adjusted ‘All Work’ figure grew by 2.7% from £13.5bn in December 2018 to £13.9bn in January 2019. However, new orders fell by -1.9% in Q4 2018 compared to the previous quarter.
Construction Output

Construction new orders in Great Britain have now fallen below the seven-year quarterly average (£11.85bn) for the last four consecutive quarters:

New Orders
  • Lucy Homer, Lendlease’s general manager for design and technical, has said that the firm will avoid the use of cross-laminated timber (CLT) as a result of uncertainty in the Building Regulations. Homer, who has not given up on the material, said the company is waiting for the Building Regulations to be clarified regarding the use of CLT in the wake of last year's combustible materials ban.

“We are not currently pursuing CLT projects. Technically it should still be feasible to use but from a risk perspective we have taken that decision”

Lucy Homer, Lendlease
  • Interserve, the British outsourcer, has fallen into administration, wiping out shareholders and raising concerns about its long-term future. The pre-pack administration came after shareholders rejected a plan to alleviate most of its £630m debt pile (via a debt-for-equity swap), which would have seen their collective stake in the company diluted to 5%. Administrators EY subsequently sold Interserve’s business and assets to a new company called Montana 1 Limited, controlled by Interserve’s lenders.
  • In the recent Spring Statement, Chancellor Philip Hammond announced:
    • the Government would shortly provide a full response to the consultation on late payment terms. However, one of the policies would require the audit committees of large companies to review payment terms and report on them in company accounts
    • a £3bn affordable homes guarantee scheme leading to the delivery of 30,000 new affordable homes across the country
    • that £717m from the housing infrastructure fund has been earmarked to facilitate the building of 37,000 new homes in West London, Cheshire, Didcot and Cambridge
    • a consultation would be launched to explore new ways of funding infrastructure projects after the decision to axe private finance initiative (PFI) contracts last year
  • West Midlands Mayor Andy Street has revealed a £10bn development portfolio comprising of 24 development schemes. The largest projects in the West Midlands Investment Prospectus by value are centred on the two HS2 stations planned for the region.
  • MIPIM - the world’s biggest property conference - saw around 26,550 delegates from more than 100 countries attend the four-day exhibition. The approaching Brexit deadline was high on the agenda with MIPIM managing director, Ronan Vaspart, saying that:

...it is absolutely clear that some investors are taking a ‘wait and see’ approach to the UK as there remains little real visibility of what kind of Brexit deal may be done and exactly what impact it will have on the UK economy

Ronan Vaspart, MIPIM

UK Economy

  • Theresa May wrote to EU Council President Donald Tusk last week requesting that the Brexit deadline be extended until 30th June 2019. In response EU leaders have agreed to move the Brexit ‘cliff-edge’ back until 12th April 2019. The 27 leaders demanded that Mrs May either seal the proposed withdrawal deal this week or “indicate a way forward” by 12th April. Providing the House of Commons approve the withdrawal agreement this week, the date of Brexit will be shifted from 29th March to 22nd May. If not, the UK would have to suggest another course, which would then need to be signed off by EU leaders.
  • Employment rose by 220,000 in the three months ending in January 2019 – the biggest rise since November 2015. This helped push the unemployment rate down to 3.9% - the lowest since 1975.
  • The Office for Budget Responsibility (OBR) has cut its outlook for UK economic growth this year from 1.6% to 1.2%, reflecting a sharp slowdown at the end of 2018 that it believes has continued into the first quarter of 2019. Brexit uncertainty continues to cause notable weakness in both business investment and trade.
  • The 2019 Spring Statement showed that the UK budget deficit is under control. In 2009-10 the Government’s books were in deficit to the tune of £153bn. Public borrowing is now set to be just £22.8bn this financial year (only 1.1% of GDP).
  • Theresa May’s third attempt to push her Brexit deal through the House of Commons now faces a new hurdle. On the 18th March Speaker John Bercow, citing parliamentary precedent, said that he will not allow another vote unless the withdrawal agreement was substantially changed from the one that has already been voted on.


World News

  • Germany’s top economic experts have slashed their growth forecast for 2019 from 1.5% to 0.8% as Europe’s largest economy continues to lose momentum. However one economic expert said that given the strong domestic economy there is no reason to expect a recession.
  • At the end of its two-day policy meeting, the US Federal Reserve abandoned its projections for any interest rate hikes this year amid signs of an economic slowdown. Having downgraded US growth, unemployment and inflation forecasts, policymakers said the Fed’s benchmark overnight interest rate was likely to remain at the current level of between 2.25% and 2.50% at least through this year.
  • France has warned the EU that attempts to hammer out a tariff-reduction deal on industrial goods with the US should not be rushed into. Paris is seeking guarantees that sensitive economic sectors will be protected in negotiations that it hopes can be delayed until after May’s European Parliament elections.
  • Donald Trump’s leading trade negotiators will head to Beijing this week as they try to hash out the remaining sticking points in talks to end the trade war. It was hoped to conclude an agreement by the end of the month but the timeline has now slipped to the end of April. One of the biggest hurdles has been the enforcement mechanism being insisted on by the US in order to ensure that China lives up to its commitments.
  • China has passed a new law that grants foreign companies equal standing with state-owned businesses. Beijing hopes the law will help soothe the concerns of foreign businesses, keep investment flowing into China and help with trade talks with the US.


Commodities and Materials

  • Chinese factory output slowed to its weakest pace on record earlier this year in a sign that the economy remains under pressure from US tariffs and weaker domestic demand. Output from the country’s manufacturing sector rose by 5.3% in the year to February 2019 – down from the 5.7% rise in the year to December 2018.
  • The world’s biggest independent energy trader, Vitol, forecasts that demand for oil will peak within 15 years. Russell Hardy, chief executive of Vitol said:

We anticipate that oil demand will continue to grow for the next 15 years, even with a marked increase in the sales of electric vehicles, but that demand growth will begin to be impacted thereafter.”

Russell Hardy, Vitol
  • A Brazilian court has authorised the resumption of activities at Vale’s Brucutu iron ore mine one month after the Brumadhinho dam collapse which froze about 9% of the company’s annual production. Mining stocks slumped on the news as restarting operations is expected to ease supply constraints.
  • Oil prices continue their steady climb in 2019, reaching a high of $67.6 a barrel on 19th March. Traders are betting that the market will tighten with US sanctions restricting supplies from Venezuela and Iran. However, doubts remain as to whether prices can rise much further given record US shale industry output.


Announcements in the Construction Press

  • Balfour Beatty has been named as the preferred bidder for Network Rail’s £1.5bn Central Track Alliance contract. Balfour Beatty, who has an 80% share in the 10-year alliance, will develop, design and deliver track renewals and crossings and other infrastructure works across the London North West, London North East and East Midland routes.
  • Despite a 2% hike in turnover Kier has reported a pre-tax loss of £35.5m for the six months to the end of December 2018, compared with a profit of £34.3m a year earlier. Kier said profit performance was hurt by administrative costs related to its debt-cutting turnaround plan and a sharp rise in one-off costs associated with its Broadmoor Hospital project and Environmental Waste contract.
  • Balfour Beatty reported that its order books rose by 11% to £12.6bn in its full-year earnings report. The group also reported a 10% increase in underlying pre-tax profit to £181m for the full year. Its UK construction business also hit its margin target range, turning in an underlying margin of 2.4% during the last six months of 2018.
  • Crossrail chief executive Mark Wild has revealed the scale of work that needs to be completed before Crossrail stations become operational. He said:

The other major challenge [beside fit-out, testing and commissioning] at stations is completing the extensive communications systems installation that we need to deliver an operational station.


“Each Elizabeth line station has over 50 km of comms cabling, 200 CCTV cameras, 66 information displays, 200 radio antennas, 750 loudspeakers and 50 help points. All this technology needs to be fully installed, tested and integrated.

Mark Wild, Crossrail
  • HS2 chair Allan Cook has said that he does not believe the project's £55.7bn budget, which was laid out in 2015, would be increased by the transport department. Fronting the House of Commons transport committee he said that he does not expect any more money to be made available for the project.
  • The Building Research Establishment (BRE) has introduced a pre-approval process for its Environmental Assessment Method (BREEAM) sustainability certification scheme. Developers with several projects of a general specification can now get them evaluated by BRE Global all together and up-front, helping to streamline work on several similar projects in parallel.
  • Wates saw a 9% drop in revenue at its construction business compared to 2017. The contractor said the reduction was “a residual effect of the deceleration in the market in the quarters before and after the EU referendum”. However, the firm has still managed to post a pre-tax profit of £35.9m and said it had a pipeline of £5.4bn heading into 2019.

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