The UK's construction sector is in pretty good shape but the shares of the major companies have succumbed to the general market malaise. True, some have been affected by the collapse in the housing sector, where construction has slowed to a crawl. But, for the likes of Kier Group , this forms a relatively small part of their operations. What's more, companies such as Keller , the specialist in ground work operations, can boast a diverse revenue stream that is not reliant on activity within the UK.
Even in the UK there are grounds for optimism. The credit crunch and wider financial crisis have tripped the UK economy into recession, but the government has taken steps to bring forward infrastructure spending in an attempt to preserve jobs and boost activity. Capital spending earmarked for 2010-11 is being brought forward, and includes fresh expenditure on schools, roads, social housing repairs and flood defences.
Admittedly, the outlook for 2010 is less certain because spending projects brought forward are less likely to be replaced with new work. Still, order books are still pretty full right now and this year should see a steady stream of fresh work, especially after plans are initiated in the US for the biggest investment outlay on infrastructure for over 50 years.
We maintain a positive stance on Kier, which has already secured 90 per cent of this year's expected revenue, and Morgan Sindall, which boasts a record order book even after a downturn in its affordable housing division, Lovell, although this business accounts for just 2.5 per cent of group turnover. Prospects for Keller also look good as most of the company's business and growth has come from operations in the Middle East and Asia, two markets where the slowdown in construction has been markedly less pronounced. It's worth noting that just 4 per cent of group operating profits are generated in the UK, where construction companies tend to have their own in-house site preparation divisions.
In the builders merchant sub sector, Travis Perkins is likely to face a tough year, with the emphasis on cutting costs and cash conservation. Weakness in the housebuilding sector and poor sales at its Wickes DIY chain will hit profits this year, and the dividend payout is also expected to be cut. For SIG and BSS, demand for plumbing, heating and insulation products has been hit by the housing slump and also by strains on spending by local authorities. And while government incentives are expected to revive energy conservation budgets, the outlook for the current year remains grim.
SUMMARY OF CONSTRUCTION & MATERIALS SECTOR:
