Galliford Try risk ratchets up

The construction division accounted for 54 per cent of first-half revenue, but just 6.5 per cent of operating profit (excluding exceptional costs, PPP investments and central costs). During the past 18 months the division has been hit by unexpected increases in legacy and ongoing contract costs. In April, management announced plans to review the scope of construction operations and said problems at its Queensferry Crossing joint venture would push 2019 pre-tax profits £30m-£40m below consensus expectations – which previously stood at £156m. 

The news followed £26m in additional costs being taken during the first half for the Aberdeen Western Peripheral Route project – a joint venture with Balfour Beatty (BBY) and Carillion – which was completed in April. Meanwhile, the company is in dispute over £38m relating to three contracts with a single infrastructure client completed last August. All this is in addition to exceptional items of £45m in 2018 – including the group’s share of costs from Carillion’s insolvency – and £89m the year before that. The group was also forced to undertake a rights issue in 2018, raising £150m in net proceeds. Admittedly, the group no longer undertakes risky, fixed-price projects such as the Aberdeen Western Peripheral Route. 

With wafer-thin underlying operating margins of 0.9 per cent, following the warning house broker Peel Hunt put a value on the construction division of a negative 110p a share given the risk of further “disappointments” from the Aberdeen road and other meaningful contracts and costs associated with scaling back the division. The division has also had to contend with clients delaying decisions on projects due to macroeconomic uncertainty. That meant revenue dipped 13 per cent to £718m during the first half, while the order book shrank by £300m to £3.2bn. At the half-year stage, non-current receivables (money owed by clients but not expected for over a year) increased by £109m to £249m.

Linden Homes, which accounted for 86 per cent of first-half underlying operating profit, has been a bright spot over recent years. However, it is exposed to the weak London and the south-east. So while a change in the sales mix helps explain a 5 per cent drop in first-half average selling prices to £352,000, we view this, along with a 3 per cent fall in sales reservations to £850m, with some foreboding. Management plans to reduce exposure to London and the south-east and to build more affordable homes, which rose to 30 per cent of completions, from 26 per cent in the prior year. At the same time, operating margins for the division rose to 19.6 per cent during the period from 18.5 per cent. Recent performance from Galliford's regeneration business (16 per cent of profit) has been impressive, with 34 per cent profit growth in the first half.