Cost inflation was a major factor behind the sector's underperformance last year. For all the deadlines about deflation, this problem is likely to persist into this year. The underlying picture is a lot rosier, though.
Carillion (CLLN), for example, has already secured 85 per cent of this year's projected workload, with confirmed and probable orders reaching an impressive £18bn. Despite its construction activities, the group is in fact classified by FTSE as a support services group as a result of the broad range of activities it has to offer. These include energy, rail and road support services as well as consultancy and facilities management. The attraction is that it can offer a package covering all pre- and post-contract activities, which customers increasingly like to see provided by a single operator.
Activity in the coming months is likely to be subdued ahead of the general election, particularly for public-sector suppliers. But the sector received a boost late last year with the publication of a national infrastructure plan. This was generally welcomed, even if previous initiatives have tended to be long on ideas and short on delivery. Crucially, though, the proposals also include measures designed to speed up the planning process.
This should breathe life into builders' merchants such as CRH (CRH) and Travis Perkins (TPK), which are already enjoying the benefits of a growing housebuilding programme. As always, though, even the best-laid plans can be derailed by a bout of poor weather, which makes ground preparation work in particular hard. Keller (KLR) found this to its cost early last year, when atrocious weather in the US hit the ground engineering specialist. Now, however, the US is an attractive market to be exposed to, judging by more recent growth trends. That's also good news for Wolseley (WOS), which makes nearly three-fifths of sales in the country.
Construction firms remain generally upbeat. In a recent survey, only 15 per cent of respondents cited demand deficiencies as a major factor holding back output, while over half identified labour and material shortages as the key constraint. If these problems can be addressed, the sector should see its growth accelerate this year - but that probably won't be until well into the second half.
Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC View |
CRH | 1,598 | 11,837 | NA | 2.5 | -2.0 | Hold, 1,439p 19 Aug 2014 |
Balfour Beatty | 206 | 1,418 | 11.9 | 6.9 | -30.6 | Sell, 189p 30 Sep 2014 |
Keller | 926 | 660 | 12.4 | 2.6 | -20.7 | Buy, 916p 5 Aug 2014 |
Kier Group | 1,605 | 891 | 14.9 | 4.5 | -15.8 | Buy, 1,705p 18 Sep 2014 |
Carillion* | 341 | 1,469 | 9.8 | 5.2 | -1.6 | Buy, 341p 18 Dec 2014 |
Grafton Group* | 666 | 1,548 | 28.2 | 0.0 | 4.4 | Hold, 640p 28 Aug 2014 |
Howden Joinery* | 420 | 2,715 | 23.7 | 1.5 | 23.4 | Buy, 326p 24 Jul 2014 |
SIG* | 179 | 1,058 | 15.0 | 2.1 | -12.9 | Buy, 172p 12 Aug 2014 |
Travis Perkins* | 1,872 | 4,656 | 16.6 | 1.8 | 0.8 | Buy, 1,594p 20 Oct 2014 |
Wolseley* | 3,839 | 9,983 | 19.6 | 2.2 | 9.2 | Buy, 3,696p 16 Jan 2015 |
*FTSE classification: support services |
Favourites
Carillion and Wolseley are solid performers, both well placed to exploit any increase in infrastructure spending, with decent dividends to boot. Both have managed to maintain or improve their operating margins thanks to self-help measures and a more selective approach to taking on work.
Outsiders
The prize for the worst performance of the year goes to Balfour Beatty (BBY). Its share price halved at one stage after a string of profit warnings. Cost inflation, programme slippage and poor operational delivery were among the reasons proffered to explain the mess in the group's UK construction services division. And while the sale of Parsons Brinckerhoff will swell the coffers, it doesn't fix the problem. As last week's latest profit warning suggests, that will take time.