18th February 2020

HS2 approval will ‘benefit firms not on the project’

HS2’s go-ahead will see the UK construction market “tighten” and will benefit firms not directly working on the project, analysts have claimed.

Prime minister Boris Johnson told the House of Commons shortly after midday that “the cabinet has given HS2 the green signal”, ending months of speculation about the future of the UK’s most expensive construction project.

Analysts told Construction News the benefits to the industry would reach beyond those businesses directly employed on the scheme. Applied Value analyst Stephen Rawlinson said: “The main thing is it gives assurance of work for the industry for quite some time and tightens up market conditions generally. Whatever the level of demand, that will be tighter, and not just for those guys [on HS2] but others like Morgan Sindall, which do a lot of rail work in and around stations and regeneration projects, and all the tier twos that will benefit.”

Numis Securities director of building and construction research Howard Seymour said: “Given the scale of works and visibility of workload, the news will be a welcome sign for all listed contractors, irrespective of their status on the project.”

Shares in Balfour Beatty, Kier and Costain – which have all won phase one civils work – were up this morning in anticipation of the government’s announcement. Balfour Beatty had risen by about 2.8 per cent, Costain was up by about 5.8 per cent and Kier, which has been boosted by a recent ‘buy’ recommendation from analysts at Liberum, was up 9.8 per cent.

Shares in most contractors have been under pressure over the past two years in the wake of contractor Carillion’s collapse, as well as concerns about demand and low margins in the industry. CMC Markets analyst David Madden said HS2’s progress might improve investor sentiment, but would not completely change it. “I think it’s a good start,” Madden said. “It might help move it out of the doldrums, but it isn’t enough to change perceptions of the entire sector.”

HS2’s go-ahead could be a signal that the government is serious about making large infrastructure investments, but Madden said investors would likely wait before piling into contractor stocks to reap the benefits: “They want to see some detail, but this is the first move.”

He also warned that while HS2 would increase workloads, it did not necessarily mean higher profits would follow. “It’s important that contractors don’t excessively stretch themselves and take on too much risk,” he added.

Commercial terms between HS2 and contractors are being negotiated to reassign risk on the project. A National Audit Office (NAO) report concluded that one of the reasons that the price of phase one civils contracts had jumped from £6.1bn to £10.7bn was because contractors moved to derisk delivery of the project. Mindful of risks post-Carillon, firms produced risk-averse designs for civils works, which the NAO described as “less efficient”. HS2 has claimed that new commercial terms, which will cut the risk contractors take on, will reduce the cost of works by about £1bn.

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