Changes afoot in order books at Balfour Beatty and Carillion

Balfour Beatty and Carillion are two of the construction industry’s biggest names, but both have suffered financial indignities. Balfour Beatty issued seven profit warnings to the City in the two years to 2016, while Carillion’s latest accounts show a £845 million black hole due to problem contracts. Both companies have discovered that old stock market adage about contractors that ‘profit is sanity and turnover is vanity’ still holds true and this is reflected in Glenigan’s contract league tables. A year ago, Balfour Beatty was ranked in the fourth spot in terms of awards and Carillion two places behind but the latest tables to Q2 2017 tell a very different story. Balfour Beatty is clinging on to a place in the top 10 in tenth but the group’s order book has shrunk by a third to £1,155.8 million (Q2 2016: £1,743.5 million). At Carillion, the latest awards total has is down 37% to £975.7 million (Q2 2016: £1,546.9 million) and the group has nearly fallen out of the top 20 contractors after tumbling to 18th position. Part of the reason for these falls is that large contracts won more than 12 months ago have fallen out of the 12-month rolling total for both companies, while the totals also do not include term maintenance or framework agreements but there is also some repositioning. However, the tables show significant changes at both companies and hint at differing strategies. The bulk of the fall at Balfour Beatty has come in civil engineering orders, which have shrunk 73% to £266.6 million (Q2 2016: £995.2 million). In contrast, building-related contract awards grew 20% to £889.2 million (Q2 2016: £748.5 million). At Carillion, civil awards dropped 23% to £422.3 million (Q2 2016: £552.1 million), while building orders slumped 44% to £553.3 million (Q2 2016: £994.8 million). While falls can be perceived as negative, a reduction in larger projects, which are typically riskier, can be a positive. Balfour Beatty appears not only to be focused more on building-related work but also smaller schemes. At Q2 2017, the average contract won totalled £18.0 million (Q2 2016: £31.7 million). At Carillion, the average contract award in the 12 months to June 2017 more than halved to £16.8 million (Q2 2016: £35.9 million). While both companies are national contractors of long-standing, there appear to be changes evident in regional exposure. Balfour Beatty is among the UK’s top contractors in only four of UK’s 12 economic regions as the onus has shifted to bigger value projects in southern England. In contrast, Carillion is – so far - maintaining a regional presence and among the top 10 contractors in six regions. In London, Balfour Beatty’s order book totals £589.9 million, while in the South East the company is top with an order book of £529.5 million. The average project in the capital was valued at £49.1 million and just £44.1 million in the South East. Carillion was in the top 10 in four regions a year ago so there has been regional growth and also shifts. The group was top in the North West a year ago and this region still provides the biggest exposure with awards totalling £176.2 million and the average project value was £29.4 million. Carillion was also top in the West Midlands a year ago but no longer features in the top 10 or in London, where awards totalled £651.1 million at Q2 2016. While Balfour Beatty is starting to recover, Carillion’s position seems likely to change going forward after the July 2017 profit warning.