The Pandemic has impacted UK construction in many ways.
It is generally thought that the construction sector has fared better than many parts of retail, hospitality and leisure, and that many construction sites have been continually open except for the first few weeks of the UK Lockdown. This has been supported by anecdotal data from the majority of our MHA clients.
Recent analysis of UK construction M&A deals based on the year before and after the start of the first lockdown show that whilst the Pandemic has been very bad for volumes in the UK Construction sector, the deals that are being done after the impact of Covid 19 include a higher level of goodwill.
The analysis has been based on MarketIQ data for reported deals of UK Construction companies (as per their SIC Codes) for the two years ended 31 March 2021; and the impact on deal volumes, average deal size and average levels of goodwill have been calculated.
Since the Pandemic began, UK Construction reported M&A deal volumes have decreased 85% and the average deal size has fallen 35% to £12.3m. The average size of the target companies being acquired reported net assets of around £4m which means that, typically, goodwill represented over 2/3rds of the actual deal size.
Goodwill is measured as the difference between the assets being acquired and the value of the deal and represents that are not value on the balance sheet of the acquired company, such as the value of its brand, its contracts, its intellectual property, its intangible assets and future profitability.
The observation that the level of average goodwill is increasing suggests a couple of factors:
- Buyers are being more choosey – their due diligence process during the deal process may identify problems and risks at the target company which mean they are unable to complete a deal acceptable to the sellers.
- Buyers only want to acquire companies that have a niche trading position and during the Pandemic there has been a “flight to quality” – only strong businesses are being sought after and so only deals with these better quality, niche target companies are completing.
(Or it may simply be that only the better quality deals are being reported – in fact only about 1 in 8 deals were reported – but there is no real evidence of this.)
So if you are the owner of a UK Construction company how do you increase your levels of goodwill and hence your attractiveness to a buyer? In short here are five quick tips:
- Increase your quality of profits: in particular your recurring profits which can be identified by your ongoing contracts, the length of time remaining on those contracts and to a lesser extent the longevity of your recurring customer base;
- Increase your pipeline and order book: this gives the buyer greater confidence in the future;
- Protect your intellectual property: with patents, systems or know-how;
- Protect your reputation: especially for quality, health and safety and customer service; and
- Maintain excellent Management Information: to demonstrate that the detailed financial records and decision making evidence that you are a well run company.
As we start to come out of the lockdowns and return to the “new normality”, it will be interesting to see how quickly construction deal volumes return or whether the focus on quality will continue for more years.
Two new data releases last week showed further positivity in the UK Construction sector.
Coronavirus Job Retention Scheme
The latest government data shows the number of UK construction employees who are on furlough at the end of March.
The figures at the end of March 2021 do show a solid improvement since the start of January when there was over a quarter of a million construction workers out on furlough.
At 31 March 2021 there were 196,500 construction workers on furlough. To give this some context, in the previous year there was a maximum of 723,600 furloughed on 14 April 2020 and 130,700 at 31 October 2020.
UK Construction PMI index
The most recent Construction PMI index data from May 2021 shows a levelling off in month on month construction business activity. The index moved slightly down from 61.7 to 61.6 in April 2021.
This simple data hides what could be further evidence of a huge turnaround in private construction as it represented a strong showing with activity high in government infrastructure, housebuilding and commercial building work.
This is very encouraging as earlier in the year the Government’s data to February 2021 showed declines in quarterly construction activity. This was largely being driven by significant decreases in private commercial, industrial and new homebuilding, offset somewhat by increases of £250m of infrastructure spend and almost £100m of other public works.
Overall, UK construction continues to get back on track. From experience, it is at these times of recovery that companies may experience that their working capital comes under immense stress and further funding is required.
This was evidenced earlier in the year when the Chartered Accountants’ ICAEW quarterly business confidence monitor showed that one of the main challenges was late payment of debts. Whilst this has been a common theme in the construction sector for many years, especially for second tier sub-contractors, there may be some alternatives from banks keen to assist. For example, Lloyds Bank have a new scheme aimed at supporting these subcontractors that need to fund plant and machinery required for government projects including HS2.
Further government funding support was announced by Rishi Sunak in March’s budget for small and medium-sized businesses. The Recovery Loan Scheme aims to help viable SMEs with access up to £10m of government-backed loan funding.
It is too early to say how popular this will prove to be but early reports from bank sources show that the initial take up is significantly less than that of last year’s Business Interruption Loan Scheme.
Steve Plaskitt, a partner at MHA, an accountancy firm, said the chancellor’s spring budget has stoked the fires of the construction industry with policies that will keep house prices higher. He said: The spring budget was a boon for both house buyers, who stand to benefit from the extension and phased ending of the stamp duty holiday, and house builders, who will hope that the government’s guaranteed support for 95% mortgages until the end of 2022 will drive demand. The government’s infrastructure spending, such as the £27bn earmarked for roadbuilding, is also impressive and will create much needed stimulus for the industry. Collectively these measures will underpin performance in the sector for the months ahead. Plaskitt does question whether the pandemic will change longer-term conditions for the industry, including Britons’ apparent affection for high-rise city living and jobs in expensive city-centre office blocks.
Our Corporate Finance team and Legal experts from Muckle LLP have helped Northumbrian Roads to join forces with one of the UK leaders in road building.
The North East road maintenance contractor was sold to part of a global construction group as part of its strategy to build its presence in the infrastructure sector.
Prudhoe’s Northumbrian Roads Limited is a road surfacing and highway maintenance contractor with a strong presence in the North East market.
The acquisition is part of the buyers’ strategy and will allow the company to strengthen its position as it seeks to gain market share in the major infrastructure schemes it believes will be needed as part of the economic recovery following the Covid-19 pandemic.
Northumbrian Roads, which has depots at the Port of Tyne and the Port of Sunderland, was established in the late 1980s by the late John Lynch and his business partner George Barton.
Among the high profile contracts, it has been involved in was the re-surfacing of the Wearmouth Bridge in Sunderland last year.
Our Corporate Finance team and commercial law firm Muckle LLP supported Northumbrian Roads in a deal that ensures the business will continue to grow under their new ownership.
Sean Lynch, Owner, from Northumbrian Roads said:
“Ever since the company was founded by my father John Lynch and business partner George Barton over 31 years ago, we have progressively grown the company, focusing on strong relations with our customers, teamwork and innovation, complemented by the highest quality materials and a first-class service.
The take-over process was made smooth and the legal and financial aspects were carried out in such a professional manner by both Muckle LLP and MHA Tait Walker that we had confidence that we were doing the right thing for the company to move forward.”
“It is great for the Lynch family to be able to sell their shares and to see the company their father founded many years ago become part of a larger group and to continue to serve the North East. I am sure the business has a very bright future.”
Muckle LLP’s corporate lawyers Matthew Walsh and Sara Worsick advised the sellers on the legal aspects of their sale, with commercial property advice from real estate lawyer Deborah Lazenby.
Matthew Walsh, corporate partner at Muckle LLP, added:
“We’ve advised Northumbrian Roads for many years and it is no surprise that the company has attracted the attention of a national leader in its field. It is a very well-run business and, with the added support the acquisition will bring, I’m sure it will continue to thrive within our region.”
This blog was written by Steven Whitehead, our Financial Planner and Secured Lending Specialist.
With current headlines of Covid-19 infection rates on the increase, a second lockdown, and increasing fear of job losses on the horizon, it all paints a gloomy picture.
So why is the sun shining on the housing market?
Changes to the housing market
At the start of November, the Nationwide Building Society reported that house prices rose at their fastest rate for 5 years in October. There would appear to be a number of factors that could be considered; the first being a surge in house sales after the first lockdown ended, which created the impression of a property boom, and a shortage of available properties resulted in house prices getting pushed higher and higher as estate agents set deadlines for offers to be made under a “sealed bid” scenario.
Or it could be as a result of the Government’s generous Stamp Duty Holiday, which sees the Stamp Duty threshold increased to £500,000 before it is paid on a main property purchase. This would result in a £15,000 saving on a purchase price of £500,000.
However, the mortgage market does not appear to share the same level of enthusiasm as the estate agents and the media as they proceed with a greater level of caution and scepticism at the rising house prices. With the extension of the furlough scheme until Spring 2021, there is still no clear indication of how many businesses will fail and how many jobs will be lost in the new year.
Back in September, the Centre for Economics and Business Research predicted that house prices will fall by around 14% in 2021 as the Stamp Duty holiday comes to an end and demand drops off. It would appear that it is this fear that is driving mortgage lenders to adopt a more cautious approach to their underwriting and lending policy. We have already seen the Banks and Building Societies removing competitive fixed rate mortgages from their product range with little or no notice and some lenders removing their full product range to re-introduce it with higher rates and the need to provide larger deposits by increasing the LTV (loan to value)
What options do you have?
You could sell your property and achieve a high price now and purchase your next property at a potentially inflated price. If you have no plans to move house in the medium to longer term, then a 14% drop in value in 2021 may not have a huge impact on your longer term plans.
You could sell your property and achieve a high price now and then move in with family or into a rented property and wait for a house price crash and “Bag a bargain”. You may well bag a bargain, but what if a crash never comes and we continue to see steady growth? Then you will then have to start to climb back onto the property ladder, with higher property prices and the re-introduction of Stamp Duty from 1st April 2021, so you could find yourself financially bruised.
Don’t rush into it
Buying a property is likely to be the largest purchase you will ever make, so there is no need to rush into it. If you were buying a car or upgrading your mobile phone, then you would start by researching the options available to ensure you were getting the best deal. When you are buying a property you need to do the same. Your head and heart will have different opinions so you need to stop, think and then proceed with caution.
Many Banks and Building Societies have tools on their websites that can help you calculate the maximum amount you can borrow or work out your monthly mortgage payments. As mentioned earlier, the mortgage market and lending policy can change overnight so it is always wise to speak to an independent mortgage adviser to ensure that you are getting the best advice.
Will the sun still be shining on the property market in 2021? Who knows.
As a mortgage is secured against your home it may be repossessed if you do not keep up the mortgage repayments.