Carillion Adapting to Changing Global Construction Landscape

Amidst further bad news for the construction industry, with a weak outlook and confidence reported at an 18-month low in September, Carillion is rather bucking the trend. Its latest market update forecasts that earnings growth for 2010 will be in line with market expectations. The consensus view of market analysts is that pre-tax profit for the year will be around £181 million.The first half of 2010 saw pre-tax profits rise by 17%, even though revenues were lower, falling by 11% from £2.82 billion last year to £2.5 billion. This was due partly to the company focusing on improving its margins rather than overall income, with margins rising from 2.5% to 2.8%. Orders worth over £3 billion were gained in the first six months, taking the total order book to £18.9 billion.Not Such Good News for Construction…Reading more deeply into the figures, however, shows that UK growth is focused largely on the company’s support services activities rather than construction while any expansion in construction is mainly abroad.Support services is Carillon’s biggest division in terms of profits and has a target operating margin of around 5%, which the company expects to achieve this year. It has reported its strongest ever pipeline of contract opportunities in this area. Much of this is put down to the public sector outsourcing more of its work in an effort to cut costs. However, this is by no means the only source of the growth, with new orders in the last quarter including a £60 million contract in the financial services sector.The figures for support services have also been boosted by the signing of a contract extension with EDF Energy Networks that is worth £200 million over a 5-year period. The original 4-year contract, which started in 2007, has now been extended from January 2011. Under the contract, Carillion provides infrastructure services for sub-stations as well as cabling to support the electricity network in the East of England. The company also expects revenue from its Openreach support services contract to improve from £115 million to £145 million a year as a result of an extension to the contract’s scope. Increased activity and the need for central and local government to reduce their costs has resulted in an expectation for growth in UK support services for at least each of the next three years.Prospects in the public sector are improved by Carillion being awarded a Buying Solutions framework agreement for facilities management. The effect of this is that public sector organisations can select from one of eight framework holders without having to go through a full procurement process. This not only speeds up the process but also makes Carillion more likely to win the work.Construction Growth Focused Overseas…On the construction side, expansion is likely to come largely from overseas. In addition to the UK, the company operates in the Middle East, Canada and the Caribbean. It has reported strong revenue growth in the Middle East and believes that increased activity in Canada will largely offset any reduction in UK construction work. Canada and the Middle East are both expected to see a doubling in annual revenue over the next 3-5 years, reaching around £1 billion in each of the areas.A major success in the Middle East has been the winning of a £124 million construction contract in Dubai by the company’s Al Futtaim Carillion joint venture. The contract is to build two residential towers, each of 45 storeys with a three-level basement car park, ground floor and a three level podium, for Emaar Properties PJSC. They are part of a 500 acre Downtown Dubai development and follow the successful completion of three major projects for the same client and in the same area. Downtown Dubai is the site of the Burj Khalifa, the tallest building in the world at present.Although Carillion reckons it has a well-balanced mix of current work and future orders, the balance seems to be shifting overseas in terms of construction and more towards support services within the UK. In recognition of this change, the company has announced that is plans to reduce the size of its UK construction business, concentrating more on support services and contracts for PPP projects.UK Construction Revnue to Shrink Going Forward…The expectation is that UK construction revenue will shrink by one third over the next three years, reducing from £1.8 billion to £1.2 billion annually. This will mainly result from the company being more selective over the contracts it takes on as well as focusing on the growth areas of the business in the UK. At the same time, strong international construction growth is expected, particularly in Canada and the Middle East.For now at least, Carillons strategy seems a sound one. They are an example of an adapting business that is focusing on the long-term UK growth areas of FM and outsourcing, whilst using their construction expertise and knowledge to maximise opportunities in ‘developing’ markets. However, what this trend means for the long term job prospects of the UK’s bricks-and-sticks professionals remains to be seen…