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UK construction dodged Carillion bullet but underlying problems persist

Publication Date: 21 Jan 2019 - By ReachX Team By ReachX Team
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Equity Fundamental Equity UK Construction

This month marked an infamous 1-year anniversary for the UK construction industry – the 15 January 2018 collapse of Wolverhampton-headquartered multinational facilities management and construction services company Carillion. 

While most experts agree the company’s demise was the result of flawed business models across the whole sector as well as incompetent management, lessons are yet to be fully learnt, says one market commentator,

Brendan Sharkey, Head of Construction at MHA MacIntyre Hudson, believes the UK construction sector has long suffered from a "turnover before profit culture", with many large sprawling companies chasing low margin deals, and this has yet to change. 

“Carillion was the gravest illustration of the consequences. Unfortunately, despite awareness of the pitfalls of this business model, many UK construction companies don’t seem able to break away from this high-risk, low-margin culture. They’ve conducted their affairs in this way for so long that low margins are part of their DNA.”

However, Sharkey believes there are promising signs in some quarters. “Several corporates, such as Balfour Beatty (LON:BBY), are now talking more about profit and not turnover and focusing on their strengths.”

The proof will be in the pudding and it will be interesting to see if this comes through in their financials. The current downturn in the economy may test their resolve as some corporates tend to “buy” work by pitching low prices just to keep the workforce engaged and intact.

“When it comes to SMEs, they would be wise to focus on specific sectors of the market, building up expertise and leveraging specialised skills to gain a competitive edge, rather than putting in low bids for every major contract.”

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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