After limping through a Brexit-induced slowdown last year, the construction industry entered 2020 with a renewed sense of optimism. The definitive election result and greater clarity over our departure from the European Union was set to unlock deferred spending and reignite commercial activity. Only a few weeks ago, chancellor Rishi Sunak was promising to “get Britain building”, pledging £640bn of gross capital investment to 2025 as part of an infrastructure revolution.
But the ‘Boris bounce’ has now given way to the ‘corona-crunch’. Building sites lie empty across the country and remaining projects are coming under pressure to close amid fears for workers’ health and safety. According to industry data provider Barbour ABI, more than 1,000 projects with a combined value of £25.6bn have downed tools or are likely to do so. Almost two-thirds of the delayed projects are in housebuilding, while London is the hardest hit region.
That spells trouble for the likes of Ibstock (IBST) and Forterra (FORT), which manufacture products such as clay bricks and concrete blocks – demand is driven by housebuilding activity. Even before the Covid-19 crisis escalated, Forterra was guiding to the first half of 2020 being weaker than the first six months of 2019. Similarly vulnerable, Polypipe (PLP), the manufacturer of plastic piping and ventilation systems, derived more than half of its sales from residential systems last year.
Public sector work provides more downside protection and critical infrastructure projects are still running. Where the government is the customer, this provides more security over payments. That’s of some comfort for Morgan Sindall (MGNS) and Balfour Beatty (BBY), which work across regulated sectors such as highways and rail. With this crisis set to strain balance sheets, they are better placed to weather the storm, with £102m and £395m of net cash in March, respectively.
But Morgan Sindall has significant private sector exposure and its office fit-out business will be knocked by the dearth of commercial activity. Meanwhile, Balfour is vulnerable in the US, where national construction spending declined in February and could fall further amid the pandemic. Fears of a US construction slowdown have weighed heavily on equipment rental company Ashtead (AHT) – its shares are down over a third so far this year.
Construction companies operate on wafer-thin margins at the best of times, and extended paralysis due to coronavirus would be painful. After months of grim reading, the IHS Markit/CIP UK construction purchasing managers' index (PMI) finally turned a corner in February, climbing above 50 for the first time since April 2019 – this indicates an expansion in activity. Due to the Covid-19 curveball, that momentum will prove very short-lived indeed.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
