Research Balfour Beatty plc - Essay Example

Balfour Beatty plc Task Balfour Beatty is a U.K based company and a pioneer worldwide in the Fields of Construction, Engineering, and Management Services with its business segments as Building, Rail and Engineering. The building segment is mainly concerned with the design, construction, and management of buildings. The Engineering sector is concerned with the constructions of tunnels, bridges and towering of electric cables.The Rail sector is essentially concerned with the manufacture of rail systems and equipment. The other revenue comes from the other self-funded services like medical infrastructure, hospitals, and educational institutions. In the year 2002,civil engineering accounted for almost 38%, building services 35,and rail engineering 27% of the total profits acquired by the organization. (Corporate Watch, 2006) Balfour Beatty, founded by George Balfour and Andrew Beatty, mechanical engineer and a charted accountant by professions respectively was initially into making streetcar lines. However, the world war –II brought the construction of streetcar lines to a halt and brought about a stalemate situation in the company. A landmark decision was taken at that point of time to expand into the civil construction arena. Balfour Beatty also played an instrumental role in the early 1920s in managing various power corporations across Great Britain into construction of a common “grid” in Britain. Balfour Beatty was acquired by BICC, a cabling company in the year 1969.Balfour Beatty was a subsidiary and accounted for more than half of BICC’s revenues. In 1999, BICC’s cabling operations were at a sagging low and the company decided to divest their cable operations. In the year 2000, BICC changed its name to Balfour Beatty plc. (Wikipedia, 2006) Balfour Beatty acquired Mansell constructions in October 2002. Mansell had to overcome its fund deficit of 50 million and had shareholder funds of 20 million. The deal with Balfour Beatty gave a new lease of life to the company and it had acquired 42 million during the merger process. Mansell is now one of the subsidiaries of Balfour Beatty which focuses on sectors such as social housing, education, hospitals, defence and telecoms. It should be noted that 73 % turnover of the company comes from partnering contracts and 89 % were repeat businesses (taken from the company’s website). So clearly, Mansell has focused on lower risk segments and has had utmost priority in retaining its client base and by and large,it has been quite successful. In 1998,a taskforce, led by Sir Egan came up with some proposals to improve the standards of the construction industry and expressed concerns over non-realization of full potential of the Industry. Some of the proposals the taskforce came up with were 1) Overall construction cost and time should be reduced by 10 % 2) Defects in the projects should be reduced by 20 %. 3) The industry should focus more on strategic partnerships and not continue competitive tendering for projects. 4) Safe working conditions must be provided to the employees.(Ralph Morton,2002) Task 2 Major players in the UK construction industry Carillion plc: Strengths A company which has been in the market for long and has been a subsidiary organization of Tarmac industries plc, and which was separated from the group in the year 1999 has been achieving a huge turnover right from the year of its inception. The revenue acquired by the company in the year 2005 was almost 40.8 million pounds.In February 2006, the company expanded its construction base by taking over Mowlem plc. The whole group is expected to garner a combined profit of almost 4.1 billion pounds. (Sarah Peace, 2006) Weaknesses Carillion, like many other mojors, has compromised safety for profits. After the Hatfield crash, an accident which had totally changed the functioning of the rail industry in U.K, the media exposed a shocking report issued by a subsidiary of Carillion to relax the rules on defects on tracks. The report went this way….. We are currently being inundated with defects of this kind...however it is not practical or cost-effective to cut all of them out of the track immediately when some of them can afford to wait until they are re-tested’ Another incident which went in favor of the above mentioned argument was when an unmanned runaway went down a steep track killing 4 workers and injuring 3.This unfortunate incident raised serious apprehensions on the firm’s claims that safety of its employees is it’s first and foremost priority and everything else only seconded it. The company also lost out 10 million pounds and an additional 25 million due to plunge in shares over delays in its construction. (Corporate Watch, 2006) Opportunities After the separation of Carillion from Tarmac, the company’s margins had risen to over 30%, thus making it a front runner in the road and rail sector. The PFI contracts themselves made over 15 million and the order book reached 9 billion pounds. Moreover, the company has a considerable proportion of market share in Canada and the Middle East. However, much needs to be done in terms of expansion overseas. Balfour Beatty plc: Strengths UK’s 2nd largest company with a revenue of 4.9 billion pounds and which employs more than 28000 employees directly and indirectly and which has a forward order book of 7.6 billion pounds.The company focuses on large scale civil engineering works. A very large project pipeline is in store for this company in the coming years. (Balfour Beatty, 2006) Weaknesses Balfour Beatty has, like Carillion lost out much money due to the negligence factor. Balfour Beatty was found responsible in the 1994 Heathrow tunnel collapse and was fined an amount of 1.2 million pounds, an all time high fine by the Health and Safety Executive. Balfour Beatty was also charged 0.5 million after the Rivenhall Rail disaster though there weren’t any casualties and the judge remarked “It was only by the grace of God that no passenger trains were involved in the crash and deaths were avoided.” The company was also banned from bidding in Singapore following charges of corruption. The company has been losing a lot of revenue due to these kind of hitches in operations. (Corporate Watch, 2006) Opportunities A significant growth in the PFI/PPP market offers immense opportunity for companies like Balfour Beatty to capitalize on. Balfour Beatty, oflate has relied heavily on PFI projects and we can expect this dependency to grow furthur in the coming years. (Danny Myer, 2004) Threats Private sector growth is projected to decline sharply in the coming years according to Construction Industry forecasts.Very slow house price inflation is one of the major factors to the overall slow growth. AMEC Strengths AMEC is one of the leading construction firms in the UK. AMEC has worked out on potential areas like nuclear Power, Oil and gas. AMEC had topped the revenue list of the powerful construction majors in UK for the year 2005. The best part is, 60 % of the company’s revenue has come from the overseas markets. AMEC has also been the highest performer by a long margin as far as stock market is considered. (Sarah Peace, 2006) Weaknesses This company has a high debt balance sheet and very unstable cash flows. So, it is highly unlikely that this company will pose stiff competition to Balfour Beatty. Opportunities This company has a major stronghold over the overseas construction projects and can capitalize on it by simultaneously improving its domestic market. Threats Private sector growth in the construction industry is set to decline in the coming years which is seen as a major threat to all the major construction players. With increasing competition in the domestic arena, this company might face a major problem in retaining its domestic market. (Guy, 2002) As pointed out above, since AMEC has a high debt balanced sheet and variable cash flows, it is in no position to compete Balfour Beatty. So, at the moment, we can predict that in the coming years, Carillion can be a major competitor to Balfour Beatty. Task 3 Financial Ratio Comparisons Profitability Ratio Balfour Beatty AMEC Carillion Return on Capital Employed (ROCE) 16.32 2. 31 % 17. 12 % Return on assets (ROA) 4.71 0.13 % 4. 57 % Assets Turnover 1. 70 % 1. 61 % 2. 65 % Return on Investment (ROI) 11.22% 0.39 % 14.08 % Liquidity Ratios Balfour Beatty AMEC Carillion Current Ratio 0.93 % 1.10 % 1.05 % Quick Ratio 0.88% 1.06 % 1.02 % Liquidity Ratio 0.25 % 0.17 % 0.29 % Asset utilization multiples Balfour Beatty AMEC Carillion Shareholders Equity Turnover 13.49 16.83 13.70 Fixed assets Turnover 4.06 6.43 10.70 Current Assets Turnover 2.94 2.14 3.53 Net working capital Turnover 36.73 18.47 34.74 Inventory Turnover 47.08 59.84 60.11 Source: Reuters, 2006 As is evident from the 1st table, Carillion scores over Balfour Beatty on return on Capital Employed (RCOE), Assets turnover and Return on Investment by 0.82 %, 1.95,2 % respectively. Carllion also has more liquidity ratios than Balfour Beatty.In terms of efficiency however, we have a balanced scenerio. AMEC, due to its volatile assets is in no position to compete with Balfour Beatty or Carillion.However, AMEC scores only over the equity shares turnover byapproximatley 3.4 and 3 % respectively. Both Carillion and Belfour Beatty are way ahead of AMEC interms of profitability and efficiency ratios. On the fixed assets turnover front, Carillion is almost 7 % much higher than Balfour Beatty. This indicates stability of the organization and also its sustainability. The net working capital is clearly more for Balfour Beatty. Looking at these ratios, it can be predicted that Carillion may claim major stake on the UK construction market in the future and may also intrude into Balfour Beatty’s market. As far as the share holders are considered, these companies have nothing new to offer. AMEC offers much higher stake to its shareholders than any of these two firms. REFERENCES 1) Ralph Morton (2002),UK construction Industry, Blackwell publishing. 2) Wikipedia(2006) information on Balfour Beatty found at en.wikipedia.org/wiki/Balfour_Beatty 3) Wikipedia(2006) information on Carillion plc found at en.wikipedia.org/wiki/Carillion 4) Corporate Watch(2006) information on Carillion plc,Balfour Beatty plc at http://www.corporatewatch.org.uk/?lid=278 5) Sarah Peace(2006)Partnering in the Construction Industry—A code of Practice for strategic collaborative working, Elsevier 6) Danny Myer(2004)Construction Economics, Spon Press (UK) 7) Guy(2002) Development and Developers-Perspectives on Properties Read More