黑洞社区

Cash is king 鈥� especially when there鈥檚 not much of the stuff around. The last couple of quoted companies鈥� results rounds have had their cash flow statements scrutinised rather more closely than the profit & loss pages or order books. The reason for this is that the industry鈥檚 leading players have seen what were until recently opulent cash piles start to shrink. But if it looks bad at the top, it鈥檚 grim at the bottom.

Major construction groups such as Balfour Beatty, Kier and Galliford Try have for years enjoyed generally improving free cash flow positions - that is, cash flow before acquisitions or major investments such as PFI and dividend payments. Since these players鈥� acquisitions have generally been funded by issuing shares, capital expenditure needs are modest and dividends have represented a fairly modest chunk of post-tax profit, the cash piles have grown and grown.

Tales abound of some of the bigger players getting increasingly hard-nosed. One is said to have been pressing its suppliers to accept 90 rather than 60 days payment terms

Balfour Beatty鈥檚 group net cash peaked at 拢572m in 2009 and was still a healthy 拢340m at the last December year end. Net cash within Kier鈥檚 Construction division hit 拢423m at its June year end in 2011. At the June 2012 half-year results Balfour鈥檚 net cash had shrivelled to 拢34m, while at the same point Kier Construction slipped to 拢361m.

There are lots of moving parts affecting the cash flows of larger and more complex groups, especially in the case of Balfour, which has moved into more profitable but less cash-generative consulting work. But the general trend for main contractors is that cash flow appears to be going through a cyclical downturn. Not only had the flow of cash in the good years reflected the profitability of those companies but also advantageous working capital positions - at least advantageous when turnover was rising.

Despite what appear to be wafer-thin margins by comparison with other sectors, contractors have appeared to be cash machines. That is because they tend to be paid in advance for significant proportions of the value of projects before each phase of work is carried out. Subcontractors and suppliers are generally paid in arrears. The typical balance of advance payments average around 10-15% of the value of a job (lower than was typical in previous decades but substantial nonetheless).

So each job starts off cash-positive and only starts draining the stuff near the end, when the last payment has been banked but the suppliers have still to be paid. This is alright if the main contractor wins more new work than it is completing. But when industry workloads start shrinking, main contractors鈥� cash flows can face a triple whammy: fewer new projects replacing old ones; less profit per job as clients get bidders to 鈥渟harpen their pencils鈥�; and the temptation among some to take longer to pay. Add to this subcontractors living hand to mouth and a uglier picture emerges not just for the major contractors but everyone in the industry.

Despite wafer-thin margins, contractors have appeared to be cash machines

The major contractors have seen their order books shrink, but by less than overall shrinkage in construction output. (The big players have generally benefited from the more sensible clients鈥� nervousness in awarding work to lowest bidders if they look financially strapped.) Some of the biggest groups have quietly conceded that they have had to speed up payments to their most struggling subcontractors (for obvious reasons they do not advertise the fact).
In many cases they are feeding them payments 鈥渙n the drip鈥� to keep them afloat. A project-critical trade contractor going toes-up on a job can cost the main contractor many times more than its fee. This represents another call on main contractors鈥� cash. So too, it would appear, at least some clients are getting tardier with their payments.

Not all main contractors are positioned to be quite so benevolent. Tales abound of some of the bigger players getting increasingly hard-nosed. One well known name is said to have been pressing its suppliers to accept 90 rather than 60 days payment terms, despite (or possibly because) of a burgeoning order book in recent years. (Inordinately healthy order books during recessions inevitably spark suspicions of 鈥渂uying work鈥�).

Seasonality of payment patterns is another factor, particularly for companies with nervous shareholders - or banks. 黑洞社区 might consider a competition to find the most imaginative excuses proffered to suppliers trying to get payments from some of the sector鈥檚 usual suspects in the two or even three months before financial full- and half-year ends. 鈥淕uard dog ate the cheque鈥�?

These trends exacerbate the vicious circle facing smaller companies, and have knock-on effects to main contractors prepared to do their bit for the supply chain and, ultimately, for clients, which face late deliveries due to companies going under mid-job.

Alastair Stewart is a construction analyst