Following a recent revision, the ONS reports that activity in the UK construction industry shrank by 14 per cent through 2020, the largest contraction since annual records began in 1997.
Predictably, the problem was laid bare in the second quarter of 2020, evidenced by a 46 per cent fall in construction starts. And it’s sobering to think that the magnitude of the decline was not as great as initially feared.
But even without the impact of the pandemic, the industry was facing a certain amount of disruption because of changes brought about by Brexit, not least of which a likely shortfall in the available pool of construction workers, and there are also ongoing issues linked to logistics and increased red tape.
Analysis from industry experts at Glenigan suggests that the sustained recovery seen during the closing months of 2020 will be maintained through to the end of next year, by which time the value of underlying starts is forecast to total £49.3bn, just 3 per cent adrift of 2019 levels.
The recovery is likely to be supported by greater public sector commitments, including civil engineering projects, increased investment in logistics facilities, and greater spending in office refurbishment as former work premises evolve in the face of new working patterns, or are transformed for alternative uses, including a switch to residential use.
Glenigan’s Economics Unit, headed by Allan Wilen, sees an enhanced role for digital solutions in the construction industry, not only in cutting waste and accelerating design and construction processes, but also in sales and marketing functions. Early-adapters of construction management software are predicted to “emerge from the pandemic restrictions stronger, more efficient and capture enhanced market share”.
The Glenigan analysis will play well with shareholders in Eleco (ELCO), an Aim-traded construction software specialist, which the IC placed on a buy when it was trading at 54p back in April 2018. The shares have increased in value by 131 per cent in the intervening period, yet they change hands at 27 times forecast earnings. That’s hardly exorbitant where software providers are concerned, though it would not be unreasonable to suggest that some unrealistically optimistic growth assumptions have been baked into valuations across the wider sector.
Despite the challenges presented in the early part of the year, group sales held firm through 2020, while the percentage of recurring revenue increased by 3 percentage points to 56 per cent. If anything, that trend has accelerated through the first quarter; significant given the strategic pivot towards software-as-a-service (SaaS) sales. Reported pre-tax profits were up by a fifth on the first quarter of 2020, while the cash generative nature of the business underlined a net cash position of £7.9m, a 27 per cent increase since the end of 2020.
The company’s chief executive, Jonathan Hunter, told the IC that Eleco only commands a sliver of an addressable market worth c.£8bn, so there are no shortage of growth opportunities. What's more, the construction industry is facing increased input pressure, as prices for building materials soar due to disruptions at processing plants and delayed freight deliveries. It is, therefore, quite conceivable that demand for software solutions could bubble-up as firms look to rationalise their cost base and streamline construction processes.
