The right moves: Irish construction sector in strong recovery but profit margins are thin
An analysis of a sample of Ireland's top construction companies shows that the sector is making a strong recovery, but is operating on very thin margins. The survey of 10 companies was completed using public filing information, (as of the end of June), and was carried out for the Irish Independent by Dun & Bradstreet, the world's largest provider of commercial business information. A table summarising the study is published on page 12 of this supplement.
To help me interpret the data, I met Jonathan Cushley, European account director for Dun & Bradstreet at their Irish HQ in Sandyford, Dublin 18, where they employ approximately 200 people who are mainly engaged in the research and development of business information solutions.
The study is based on companies registered in the Republic of Ireland, but can include turnover from UK subsidiaries. Most of the companies sampled have an export dimension. One headline from the survey is that nine of the 10 companies analysed are showing strong double-digit growth in turnover. Construction output collapsed from a peak of €38bn to €7.5bn and therefore turnover is recovering from a low base.
That said, the spectacular sales growth from 2013 onwards is evidence of a sharp recovery in output.
For example, John Paul Holdings Ltd, between 2013 and 2014 increased their turnover from €48.3m to €101.4m, an increase of 210pc.
Collen Construction Ltd., between 2014 and 2015, boosted their turnover from €120.9m to €192m, a growth in sales of almost 60pc.
A stark finding is that the strong growth in turnover is being achieved on the basis of very low margins, with an average profit margin for our sample of just 1.47pc.
The largest of the companies surveyed, Sicon Ltd. (Sisk) turned over €900.3m in 2014, and made a profit of €8.5m, representing a profit margin of 0.9pc.
This may serve to underline what was long thought to be the case through the recession, i.e. that companies were tendering for work at little or no margin while waiting for an upturn.
These slender profit margins (which are before tax), leave very little room for manoeuvre for construction companies and if one job goes badly, is badly priced, or a client fails to pay, there could be serious problems.
Given that the construction environment is much more positive this year, the challenge for the sector, Cushley believes, is to convert this strong sales growth into profit.
"One year's figures don't make a trend, but we expect to see the turnover and profitability figures improving further for 2016 and 2017," he says.
"To some extent your turnover is for show; it's your profitability that's key. There has to be a balance between 'sanity and vanity' and companies shouldn't drive turnover, just for the sake of it."
Noting that the balance sheets of many construction companies suffered in the aftermath of the credit crunch, Cushley adds: "Companies need to better understand their credit ratings and can do a 'credit repair' by sharing more information with the credit rating agencies. Weaker credit ratings lead to suppliers reducing credit terms, which increases your cost of business and reduces your profit margin."
Maximising your credit rating improves your chances of winning tenders, as potential clients will compare credit ratings before awarding contracts.
In Ireland, 45 of the top 50 construction companies had a positive credit rating in 2014, while six firms had a "negative net worth", i.e. they were trading while their liabilities exceeded their assets, meaning they were technically insolvent.
There is great potential for the construction sector to improve profitability.
John O'Regan, Head of Programme Cost and Consultancy for Ireland at AECOM estimates construction output will grow by 20pc this year, while building costs will rise nationally by between 5pc and 7pc, and by up to 9pc in the capital.
Cushley says the sector should be targeting profit margins of 4pc to 5pc in the short term.
And the single biggest thing a company can do to improve its credit rating? Cushley says: "Pay your bills on time."