Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

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November 30, 2023

CTO, HERC | Economy – Housing transactions fall to five month low | News – UK’s largest contractor hit by £288m loss

Company news

TClarke (CTO, 128p, £68m mkt cap)

Specialist electrical and building services contractor. Trading update.

Guidance: “The group remains firmly on track to achieve its three-year growth plan target of £500m revenues in 2023 and expects its year end [Dec] net cash position to surpass £15m, an increase of £6m over current market expectations. Notwithstanding the strength of the order book, the group is cognisant that the turbulent prevailing construction sector environment is impacting a number of market participants. As a result, TClarke has made a number of strategic decisions to preserve the business’s strong market and financial position. These decisions have included early contract agreements and the changing of some supply chain partners mid contract to protect project completion dates. As a result of the actions taken in the second half, the group’s 2023 operating profit is now expected to be in the range of £9 – £10m”. The Board’s revenue and profit expectations for 2024 and 2025 remain unchanged”.

Trading: Orders +99%, £1.1bn.

Outlook: “We have now achieved a significant milestone with our secured order book surpassing £1bn for the first time. This substantial growth positions us well for future success and provides the Board with continued confidence in our ability to deliver a strong performance into 2024 and 2025”.

Hercules Site Services (HERC, 26p, £16m)

Technology enabled labour supply company for the UK infrastructure sector. Acquisition of 60% of Future Build Recruitment, a specialist UK-based white-collar recruitment company operating in the UK construction sector, for a total consideration of £1.25m. The acquisition will integrate with Hercules’ Labour Supply division and expand the group’s exposure to the white-collar and permanent recruitment market. The Brighton-based company provides Hercules with an established presence in the Southeast of England. It focuses on permanent recruitment for main contractors, house building, high-end residential, social housing and specialist sub-contractor sectors with minimal overlap between clients. Synergies are expected to include cross-selling across white and blue-collar recruitment, the sharing of digital recruitment tools and a stronger focus on permanent placement recruitment. The consideration comprises £1.0m in cash and the issue of 994,431 shares at a price of 25.14p per share. The consideration shares are subject to a 12-month lock-in agreement followed by a 12-month orderly market agreement. The vendors can sell the remaining 40% minority interest in Future Build to Hercules, subject to the terms of the agreement. In the year ending 31 December 2022, Future Build generated revenues of £1.5m and produced profits before tax of £0.49m. Net assets, £0.38m.

Outlook: “The transaction represents a significant milestone as the first acquisition in Hercules’ history. Future Build will prove to be an excellent addition to the company and this move will be beneficial to both Hercules’ and Future Build’s clients who will now be able to fulfil both white-collar and blue-collar recruitment opportunities. It also means that the Future Build team will benefit from more exposure to the infrastructure market, which is expected to grow substantially over the next 15 years”.

Economic data

Housing transactions. Completed residential transactions fell by 2.5% on a seasonally-adjusted basis between September and October to a five month low of 82,910, according to the ONS. The Y/Y non-seasonally adjusted decline was 17.3%, following a 19.2% reduction in September – which reflected the stronger market in the run-up to the mini-budget at the end of September 2022. The Y/Y declines regionally were: England, -17.5%; Scotland, -15.5%; Wales, -19.5%; Northern Ireland, -15.7%. The rolling 12-month total was 1,066,140, a decline of 14.7% compared to the 12 months to October 2022.

Viewpoint: The transactions data, which includes cash purchases, reflects buying activity generally three to four months previously; yesterday’s improvement in mortgage approvals recorded by the Bank of England, indicates an improving trend at the ‘front end’.

Housing Transactions

Housing activity. The impact of cash transactions is seen in a chart posted in LinkedIn by Savills Research. Total mortgage approvals over the past three and a half years are 50,000 below what would have been expected in a ‘normal’ market, with the relatively resilient level of transactions being explained by a higher proportion of cash purchases.

2023-11-30 Mortgage approvals since the beginning of the pandemic

In other news …

Contractors. The UK’s largest privately-owned contractor Laing O’Rourke has announced a record pre-tax loss of £288m for the year to 31 March 2023 following “extremely challenging market conditions … [and] unprecedented inflation”. Revenue rose 13% to £3.4bn, while the pre-exceptional loss before interest was £78.8m (FY 22, £95.5m profit). Exceptional charges of £195m were driven by a provision relating to a long-running legacy contract signed in Australia in 2010. Gross margins fell from 9.5% to 3.3%. Net cash was £286m (£339m) and the group’s HSBC finance facility has been extended by two years to April 2026. Orders rose 16% to £10bn. However, the current year first half to September registered a 22% increase in revenue and group results “well ahead of management’s expectations” at £31.4m EBIT.

Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

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