Analyst's verdict on construction's five top players

With the UK construction market having become bi-polar, Joe Brent, an analyst with stockbroker Citi, had produced an 80-page report on how the prospects are changing for five of the major contractors.

Brent has run the rule over:

• Balfour Beatty
• Carillion
• Interserve
• Keller
• Morgan Sindall

“The outlook for private sector non-residential construction has gone from bad to worse,” Brent notes. “Darling’s Keynesian plan may have some benefit to the public sector in 2009 but 2010 could be an election year and there could be a pause in orders.”

Of the big-name groups, he sees Carillion and Interserve as being “more defensively positioned than the rest”.

Prospects for each of the five contain the following insights:

Balfour Beatty

Predominantly a construction business. Trading is sound. Some of the operations notably PFI, civil engineering and (near-term) public sector construction should be robust.

However the order book fades quicker than many of the other constructors since it includes less support services.

Brent feels that the strength of the balance sheet would still remain comfortable even if the pension deficit doubled.

He expects sound cash flows. A high historic negative working capital absorption for the group of 13% does leave Balfour vulnerable to working capital unwinding if construction sales fall.

However, Balfour’s current £395m facility provides over £500m of headroom, which seems very comfortable.

Performance (2007 actual, all other years estimates. All figures £m)

	2007	2008	2009	2010
Pre-tax profit	200	240	260	240
Cash generated from operations	280	260	170	120

Balfour has prudent accounting, limited un-agreed income that has not been provided and a history of strong free cash-flow generation.

Its prudence and scale serve to make it less prone to shocks.

Carillion

Involved in support services, construction and PFI investment.

The combined order book of £20bn and pipeline of £5bn provides good visibility and scope for continued growth.

Carillion’s focus on being prepaid in the public sector does leave it more exposed than most (a working capital outflow of up to £150m) to a recession in private or public sector markets.

Some analysts undervalue the PFI equity stakes because they attribute no value to the pipeline.

Risks include a failure to win a large contract, like a significant share of work at Heathrow, and government spending cuts.

Performance (2007 actual, all other years estimates. All figures £m)

	2007	2008	2009	2010
Pre-tax profit	100	150	200	200
Cash generated from operations	61	65	130	100

Interserve

The best-positioned business of the five. Two-thirds of sales are to the public sector and Interserve is particularly strong in growth areas such as health and education.

Even with a more cautious outlook for the Middle East, the region should be strong near-term and Qatar, Interserve’s largest construction market, looks set for long-term growth.

Order Book worth £6bn but arguably the order recognition is more aggressive than some of the peer group.

Scope to transfer the PFI assets into the pension.

Performance (2007 actual, all other years estimates. All figures £m)

	2007	2008	2009	2010
Pre-tax profit	74	84	88	87
Cash generated from operations	61	47	40	33

Keller

Outlook bleak. Keller is a well-run business with prudent management, however it is a geared play on the global construction market.

Trading has so far held up well, although the outlook for the US and western Europe, Keller’s two key markets, is deteriorating.

Only 4-6 months visibility which provides little comfort for 2009 and beyond.

Unlike other constructors, Keller does not operate with negative working capital. This should help to preserve cash as construction activity declines.

Keller is a beneficiary of sterling weakness – estimates include a 25% currency benefit from 2007 to 2010

Performance (2007 actual, all other years estimates. All figures £m)

	2007	2008	2009	2010
Pre-tax profit	100	100	86	80
Cash generated from operations	120	110	110	110

Morgan Sindall

Survivor. It has the balance sheet strength to survive the cyclical downturn.

MS is a construction and regeneration company, which has delivered excellent growth over the past five years. It comprises five divisions: fit out, affordable housing, infrastructure services, construction and urban regeneration.

It is at the cyclical end of the peer group.

The interim order book is put at £5.5bn. There is a concern that this contains estimates for open-market housing sales which could prove to be too optimistic.

Performance (2007 actual, all other years estimates. All figures £m)

	2007	2008	2009	2010
Pre-tax profit	62	69	55	43
Cash generated from operations	170	-31	18	zero