This time last year, the UK鈥檚 road building and maintenance contractors appeared to be in robust health. Work was coming through in a steady stream and the largest companies were making good profits 鈥� indeed, overall pre-tax profits had risen more than 27% in the previous 12 months. This year, though, while the work is still coming in, the contractors are not finding it quite so easy to turn a profit.
Overall turnover for our selection of the 20 largest contractors in the sector has increased by 3.5%, from 拢2.55bn to 拢2.64bn in the period 2017/18. Total pre-tax profits, however, fell by 8.2% to 拢134.6m (2018: 拢146.7m) reducing the average margin from 5.8% to 5.1%.
As previously, we have listed only those companies whose principal activity is listed at Companies House as 鈥渃onstruction of roads and motorways鈥�. Consequently, a number of major civil engineering contractors 鈥� such as Balfour Beatty, Costain, BAM, Skanska and Ferrovial, whose varied portfolios include an enormous share of the UK鈥檚 road construction work 鈥� are not included here.
Eurovia, the UK arm of the French contractor Vinci, is once again the largest contractor in our top 20. Its turnover for the year to December 2017 was 拢701m 鈥� down 4.4% from 拢733m the previous year, although it registered a pre-tax profit of 拢22.2m, an impressive 39% improvement on 2016鈥檚 pre-tax profit figure of 拢16m.
Eurovia is one eight contractors in our table to have recorded a decrease in turnover in its most recent results. For Eurovia, this is the first revenue reduction for a number of years and the company attributes this primarily to 鈥渓ocal authority revenue and capital budget decreases across all of our businesses鈥�.
Approximately 拢486m of Eurovia鈥檚 2017 turnover was generated by its own in-house divisions: Eurovia Surfacing, Eurovia Contracting (North), Eurovia Contracting (South), surface-dressing specialist Eurovia Specialist Treatments and asphalt producer Eurovia Roadstone.
The remainder of its revenues accrue from joint ventures with other firms. These include Ringway Jacobs, with the eponymous consulting engineer; South West Highways, a joint venture with Colas; and Bear Scotland, in partnership with Jacobs and Breedon.
Eurovia says it currently has a forward order book worth around 拢1bn 鈥� the same as the previous year鈥檚.
Kier Highways is one of the more robust performers in the sector, growing revenues by more than 10% to 拢473.5m in the year to June 2018 (2017: 拢428.4m) and growing pre-tax profits by 20% from 拢28.9m to 拢34.7m.
Its results were聽boosted by two three-year extensions worth over 拢250m a year聽secured on Highways England Areas 3 and聽9, and a six-month extension secured on Areas 6 and聽8.
Unfortunately the parent鈥檚 group results for the first six months of the current financial year (i.e. to 31st December 2018), announced in March, rather took the shine off the successes of its highways division. Kier Group made an operating loss of 拢20.9m on revenue of 拢2.2bn for these six months compared to 拢48.1m profit on 拢2.1bn of revenue for the same period the previous year.
Most of its problems stem not from core construction work, like building roads, but from support services and facilities management contracts. Its waste disposal contracts, inherited from May Gurney, which Kier acquired in 2013, have proved especially troublesome. Kier has made a 拢26m provision to cover its exit from one loss-making waste disposal contract.
Leading road maintenance specialist FM Conway also grew revenues in the 12 months to March 2018 (up almost 18% to 拢297.4m) though pre-tax profits almost halved, from 拢23.5m to 拢12.2m. 鈥淚ncluded in the results are disruption costs of nearly 拢1m from the inclement weather in February and March, and a charge of 拢400,000 for restructuring costs,鈥� explains the company.
In September 2017, FM Conway 鈥� listed in third place on our table 鈥� acquired a minority stake in East Anglian road surfacing specialist Toppesfield, which comes in at number six.
Toppesfield is a strong performer, building revenues in the year to March 2018 by about 33% to 拢88.6m (2017: 拢66.4m) and making a pre-tax profit of 拢3.7m (2017: 拢3.3m). The company says that its increased turnover is 鈥渄ue to a mix of increased highways framework volumes, a growth in new clients and expanded geographical coverage for project delivery鈥�.
FM Conway says that its new partnership with Toppesfield 鈥渨ill greatly benefit the Group鈥檚 ongoing expansion in its aggregates and asphalt business, as well as providing significantly more confidence in Toppesfield鈥檚 supply chain鈥�.
Colas 鈥� fifth on our table of the top 20 road-builders 鈥� grew turnover in 2017 after seeing revenues dwindle for the previous two years in a row. However, this was at the cost of profitability: pre-tax profit fell by more than 23%, from 拢9m in 2016 to 拢6.9m in 2017.
The company says that the increase in turnover was mainly due to 鈥渁n increase in workload within the highways contracting business which has been successful in winning and delivering new contracts during the year鈥�.
Although operating profit grew from 拢2.5m in 2016 to 拢3.7m in 2017, this improvement was 鈥渕ore than offset by a decrease in dividend income from subsidiaries which was 拢2m (2016: 拢6.3m) resulting in a lowering of overall profit,鈥� said Colas.
Colas was one of nine contractors among our top 20 to report a reduction in pre-tax profits in their most recent financial results. The average pre-tax profit margin also fell slightly, though it should be said that a margin of more than 5% is not to be sniffed at in this industry.
Nevertheless, the overall reduction in profitability is not insignificant. Costs, particularly in labour and materials, are rising steadily and are affecting contractors across the board.
Last year, only one of our 20 leading road-builders (JB Riney) reported an actual loss; this year Riney (still in the red) is joined by two others: Coffey 今日看料 and Scottish contractor WM Donald. The latter reported a pre-tax loss of more than 拢11m as a consequence of its settlement with HMRC over tax liabilities relating to an employer-financed benefit scheme (EFRBS). The result was a 拢14m write-down.
All in all, the UK road-building and maintenance sector can hardly be said to be in crisis, but the modest increase in workloads and reduction in profitability indicate that it鈥檚 not a bed of roses either.
Last autumn Highways England announced 拢8.7bn-worth of work on the national road network over the next six years 鈥� great news for the UK鈥檚 civil engineering contractors. But then, just last month, the agency announced that 11 of the 112 schemes on its original 2015-2020 investment programme were being 鈥減aused indefinitely鈥� as they no longer represent good value for money.
As ever, it鈥檚 best not to count your chickens before they鈥檝e hatched.
This article was first published in the聽
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