Blackfriar: There’s a lack of constructive signs of growth on horizon

Growth, that crucial ingredient of economic health, is set to become increasingly elusive in the construction sector, if the latest results of SIG and Marshalls are anything to go by.

The two Yorkshire building products companies last week reported six months of surging sales and profits, but warned investors not to expect a repeat in the second half.

Both companies’ results appeared to be flattered by the heavy snowfall which blanketed much of Northern Europe in early 2010.

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Huddersfield-based landscape products group Marshalls said revenues from continuing operations increased nine per cent to £177.2m in the first six months of the year. Operating profits from continuing operations were up 26 per cent to £13.7m. But chief executive Graham Holden said second half volumes will be “slightly lower”, and the domestic outlook is “softening”.

Domestic installer books – a key measure of demand from households – stood at seven weeks at the end of June. This was broadly level with April, but down on the 9.1 weeks seen a year earlier.

“We’ve simplified and refocused the business and we’re very happy now we’ve got a solid foundation for growth, but we just need a little bit of help from the market,” said Mr Holden.

Sheffield insulation and roofing manufacturer SIG also warned growth will slow during the rest of this year. In the six months to June 30 SIG’s sales from continuing operations were up by 10.2 per cent to £1.34bn. Underlying pre-tax profits soared 63.9 per cent to £35.4m.

“Year-on-year sales growth has been slowing after a very strong first quarter,” said chief executive Chris Davies.

He said contractors are seeing a “marked reduction” in projects coming out to tender in bigger build projects. Local authorities are also cutting back on spending, he warned.

Tallied with comments from housebuilders such as David Ritchie, the chief executive of Bovis Homes, Blackfriar finds it hard to be bullish about the construction sector or its supply chain.

“I would take a bet on activity levels and pricing being almost where they are now (in 12 months),” said Mr Ritchie.

“We’re building in line with sales demand. If demand increases, we will build more. But we can only build with customers being confident to buy.”

In short, both the domestic sector and the public sector are being squeezed. One hope is that a recovery in the private sector drives overall growth.

In an attempt to combat this downturn, Marshalls is getting smarter with its products and marketing. It has been developing its “integrated offer” to cross-sell more of its products, targeting the rail sector with packages including tactile paving, benches, signs and bollards.

It is also looking abroad, making a foray into Western Europe by opening two sites in Belgium to tap a demand for specialist stone and UK products.

From there it hopes to cover Holland and Northern France. Its overseas sales stand at three per cent and it wants to grow them to 10 per cent in 2014.

SIG has a headstart on European expansion: 56 per cent of its sales now come from mainland Europe. Its strongest growth came from France, where first half growth was 16.5 per cent, compared with a measly 4.2 per cent in the UK and Ireland. The construction sector and its supply chain has endured a terrible recession. The job cuts and business failures of the past three years took out a whole chunk of the sector, but there is little sign of respite ahead.

The hope is that companies have taken advantage of the recent lull in the storm to bolster their defences, shore up balance sheets, and invest in genuine growth opportunities. Waiting passively for an upturn is not an option.

Both SIG and Marshalls demonstrate this determination to seek out growth.

But with the Eurozone debt crisis deepening, even expanding in Europe may not necessarily be a blueprint for success.

n If traditional industries such as construction are unlikely help lift the gloom over the UK economy any time soon, IP Group’s call for more investment in innovation is a message worth listening to. Universities, the UK’s hotbed of research and innovation, face a spending squeeze as their government funding is choked.

IP Group, which helps turn university research into business, raised £55m earlier this year to accelerate its investment in spin-outs from universities including York and Leeds. But this is a fraction of the funding needed to successfully exploit UK universities’ potential.

“Innovation has never been of such importance to the UK economy,” said IP Group chief executive Alan Aubrey.

The need to rebalance the economy and slash the public sector debt is vital over the next five years. But squeezing our universities to the point of suffocation will stifle the UK’s growth for the next 50 years.