Business World

Friday 22 September 2017

Share Watch: Skanska - the builder that boasts no snag lists

John Lynch

One of the great pleasures of the 20th century was a recurring visit to see the creation of the Sagrada Família Basilica in Barcelona. The great masterpiece of architecture Antoni Gaudí started in 1882 and it is due to be finished in 2026 (to coincide with the 100th anniversary of the architect's death.)

Each visit to the construction site allows admirers to see the evolution of the magnificent building and the brilliance of the original design.

It may be a wicked thought, but sometime you'd wonder why they never handed the project over to some of the big lads, who would cobble together a few sub-contractors, get the job finished and tidy up after themselves.

In truth, probably only a handful of giant firms are capable of such a task. They would include Vinci, the French firm, US giant Bechtel, Hochtief from Germany, and the company we are examining this morning, the Swedish construction and project-development company Skanska AB.

Skanska has an enviable record of really large construction projects including the Channel Tunnel, The Gherkin in London, MetLife Stadium in New York, and the refurbishment of the UN building beside New York's East River.

With its listing in Stockholm, the company employs 58,000 people directly - a quarter-of-a-million if subcontractors are included. At any one time it has 10,000 projects, 100,000 suppliers, and a market value of SEK 71bn (€7.7bn).

The company operates in four business segments: construction, commercial property, residential and infrastructure. Construction is the largest in terms of revenue (€14bn) with profits of €0.5bn and operating margins of 3.5pc.

Commercial and residential properties revenues both account for €1.1bn each with profits of commercial property at €0.2bn, more than double that of residential. Infrastructure specialises in Public Private Partnerships (PPP) for roads, hospitals and schools. Geographically the Nordic region generates the largest revenue at €7bn, 73pc generated by the construction sector. The US follows with €5.5bn, or one third, of group total revenue, mostly from construction. Europe takes up the rear with €4bn, with a focus on Central Europe.

Skanska aims to be the world's 'greenest' construction company, which is surprising given the nature of the industry. Some say this is a response to a problem in Sweden in the late 1990s, when the company was close to a serious contamination scandal that damaged its reputation. Since then it has focused on the need for good business practices which it calls the Skanska zero concept; zero accidents, zero ethical breaches, zero loss-making projects, and zero environmental incidents.

Like a lot of Swedish firms, Skanska features cross-holdings with other outfits that end up with voting power concentrated in a holding company, Industrivarden. This company has holdings in some of the biggest companies in Sweden including Ericsson's, the packaging giant SCA, and the carmaker Volvo.

The system, however, recently suffered an embarrassing company jet scam. Some senior executives in Industrivarden were discovered using the jet to ferry their wives and children to the World Cup and Olympic Games.

It was rumoured the jet was also used to pick up forgotten wallets and dogs. Swedish morality was offended and a clear-out of chief executives and chairmen was ordered. One Skanska director was replaced.

The company has a solid balance sheet with revenues of SEK 145bn (€16bn) last year, its highest in the last six years, and operating income of SEK 5.7bn (€614m) and a high enough price-to-earnings ratio of 17.

The share price of SEK 172 (€18.5) is up 20pc on its yearly low but still below its yearly high of SEK 210 (€23). Skanska is a good solid company, whether it could ever take on the Barcelona job is something we may never discover.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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