Restructuring in the construction sector: what does the future hold?
How is the supply chain coping?
What do these challenges mean for the future of the sector?
During the pandemic, most building sites were only shut down for one or two weeks at most. The challenge was that some wholesalers, depot suppliers and factories producing materials shut down for four to six weeks – and the supply chain hasn’t yet caught up, causing severe repercussions. Suppliers in the Far East in particular, where many building products are sourced, were interrupted by lockdowns both early in the pandemic around Chinese New Year and on multiple occasions since, while thousands of shipping containers were diverted for critical PPE deliveries. While before the pandemic the price of a container was typically over £2,000, it can now be as much as £14,500. As a result, it’s likely that we will see some suppliers seeking to normalise those elevated prices to boost their margins. Together with increases in raw material and energy prices, this has contributed to high price inflation in all building product categories. At the same time across Europe there is a shortage of lorry drivers, primarily as a result of a lack of new drivers entering the sector due to testing centres being closed for much of 2020, throughout the successive lockdown periods. Many businesses are now offering big signing-on bonuses for haulage drivers, driving up costs amid building supplies becoming harder to move around the country. Prices often have a habit of staying up when they increase, and so we anticipate that it could be at least two years before price increases start to normalise. Some suppliers are adopting the logical approach of taking on extra warehouse space so they can hold onto more stock. However, as organisations with greater liquidity absorb more stock, that in itself takes capacity out of the market. For contractors, it’s about forecasting further ahead and monitoring working capital tightly. While many firms only review their prices annually, others may be more nimble reviewing it every quarter. A 13-week rolling forecast period will capture most important financial figures including weekly and monthly receipts and payments, plus quarterly payments such at VAT, as well as rent and interest charges. Critically, contractors need to be brave in passing on their additional costs to clients and developers. Many contractors are not in a position to further strip their margins. Supply issues and price inflation are being experienced across the industry, so clients should be open to discussion. One of the key messages to any business tendering for construction projects is not to fix the price of materials, as this will expose you to substantial risk. Rather, you must look to be nimble and give yourself the flexibility to pass on any cost increases.
Currently, there are still relatively low levels of formal restructuring in the sector. However, many firms have accessed all the funding they can from the Bounce Back Loan Scheme, the Coronavirus Business Interruption Loan Scheme and other sources of government support. With the impact of the end of furlough contributing further to the challenges for the sector. As things stand, the situation is still relatively benign as HMRC is only pursuing enforcement where there is evidence of criminality or fraud or escalating collection where there is no contact from a debtor. The prohibition on winding up and statutory demands ended on 30 September 2021, and we may see a change in stance from suppliers and critically HMRC. However, it will be useful to see the impact of these pressures returning and whether HMRC starts pursuing these firms more vigorously. We are unlikely to see any substantial increase in restructuring volumes until 2022, but directors will need to make difficult decisions in the meantime. In construction services, M&A activity is likely to pick up as well-funded firms will find opportunities to acquire businesses that have secured a pipeline of contracts but lack the liquidity or capacity to deliver on them. M&A activity levels across the building products sector are already very high, with owner-managers seeking to sell off the back of high levels of growth and opportunities for profit taking, as well as the stress of owning a business amidst the extreme challenges of lockdowns, record demand levels and supply chain challenges. The larger merchant groups are generally pursuing a strategy of divestment of their light side distribution businesses to focus on their core merchanting activities, a trend which pre-dates the pandemic. At the same time, several national merchanting players have themselves been acquired by UK and international private equity investors, which is likely to fuel further buy-and-build activity in the sector. Well-funded private businesses, and those that responded successfully to high demand coupled with supply chain challenges will also be cash-rich and ready to acquire competitors who have struggled, as well as successful niche players looking to exit to larger groups. Looking at forecasts for the UK economy, a rebound in consumer spending will help generate GDP growth of 7.3 per cent in 2022, the highest for 74 years, falling to 1.7 per cent in 2023 * 4 . Demand in the residential market is likely to reduce as the home improvement boom abates, which will take some pressure off supply chains. Increasingly important in the medium term will be appetite for big infrastructure projects, and whether the government sustains investment in national infrastructure projects. Many of these projects rely on foreign support to some extent, but inward investment fell by more than half to £14.2 billion in 2020. Stimulating this investment will be key.
M&A activity levels across the building products sector are already very high, with owner-managers seeking to sell off the back of high levels of growth and opportunities for profit taking. Harry Walker Corporate Finance
frpadvisory.com
frpadvisory.com
6
7
Made with FlippingBook - professional solution for displaying marketing and sales documents online