Could Carillion’s Collapse Rock an Entire Industry?
When the second largest construction company in the UK, Carillion, announced liquidation, it sent ripples of uncertainty across the region. 90% of the company’s work was outsourced and its collapse left most suppliers unpaid. Not to mention, many UK construction companies share the same suppliers, which is particularly problematic given that other big names in the space are suffering from poor financial health, with many seeing big downgrades in last 12 to 18 months. If another major UK construction company were to fall, it would be a major blow to an industry already reeling from the effects of Carillion.
Key Takeaways: UK Construction Industry Falling Behind Global Peers
The two tables at the bottom of the article compare the top 10 UK construction companies(approx) to the top 20 Global construction companies(approx). The following can be seen:
The UK top 10 has a very low average FHR of 40.5, as compared to a healthy 62 for the Global Top 20
There has been a large decline in the UK Top 10 over the last 12 months. The average delta has been -14. As compared to the -3.14 for the Global set
Six out of the ten UK names have had 10+ point downgrades. Mittie was downgraded 46 points, Galliford Try plc 25 points and Laing O’Rourke Plc 20 points
The UK’s largest construction company, Balfour Beatty, is high risk, and been struggling for the last 4 to 5 years. Prior to 2012 they were profitable with a strong FHR
Debt-to-Equity has significantly increased in the last 12 months for the UK Top 10 from 0.71 in the previous year to 1.54 in the current year. For some names, like Mitie, Galliford Try leveraging has increased dramatically
Receivable Days have also increased across the board. The average still remains below the Global averages, but still an interesting change
Net Income Margins has also fallen from 0.54% to -4.67 for the UK Top 10.
Given there are such a large number of downgrades, it begs the question as to whether there are more systemic issues, rather than Carillion being an isolated case. For instance, Balfour Beatty, the largest UK construction company, engages in a similar Supply Chain Finance Scheme to Carillion (“Early Payment Facility,” as the company calls it). The mechanism allowed Carillion’s suppliers to access payment earlier at a nominal cost to banks. Essentially, this immediate advance of payment by the banks was cheap debt that would only be discharged when construction companies like Carillion made its payment. Now that Carillion has liquidated, its suppliers are left with a heap of unsecured loans that belong to them – not the construction company – as a result of the scheme.