The future of HS2, the high-speed train line planned between London, Manchester and Birmingham, hangs in the balance today.
The UK prime minister is expected to drop plans for a northern section of the HS2 line during his speech at the Conservative party conference in Manchester, which ends today.
According to ministers, Rishi Sunak reportedly made the decision to save approximately £30 billion that could otherwise be spent on local transport.
Companies that are most exposed to HS2 are Balfour Beatty plc (LSE:BBY), Costain Group PLC (LSE:COST), Galliford Try Holdings PLC (LSE:GFRD), Keller Group PLC (LSE:KLR), Kier Group PLC (LSE:KIE), Morgan Sindall Group PLC (LSE:MGNS) and Severfield-Rowen PLC (LSE:SFR).
However, analysts say that it is unlikely that the cancellation would impact the forecasting horizon of any of these contractors.
Analysts remain buoyant on the prospects of HS2 contractors even in the event that the second phase of the project is cancelled, with investment bank Liberum recommending buying shares in these companies.
HS2 would be the largest infrastructure project in Europe, with an estimated cost of £72 billion to £98 billion.
The London to Birmingham leg of the project alone is expected to cost £44.6 billion including a contingency of £9.6 billion at 2019 prices, with a second phase planned from Birmingham to Crewe and a bill currently moving through the UK Parliament to extend it from Crewe to Manchester.
A further extension could link it from the West to the East Midlands.
The costs for HS2 have already over-run from £56 billion when first announced to potentially over £100 billion, mainly due to inflation in building materials that has increased the cost of the contracts.
Liberum analyst Joe Brent said that “significant cost over-runs are being borne by the tax-payer", identifying Costain and Kier as “most” heavily exposed to HS2.
That said, the delays have least impacted the central area of HS2 where Kier is involved, Liberum analysts said in a broker note on Wednesday.
“We would not expect a material impact from delays or the cancellation of Phase 2 on the forecasting horizon for most companies,” Liberum said in the broker note. “Kier has said explicitly that is expects HS2 to be flat for the forecasting horizon.”
Liberum analysts see “no risk” to Kier’s estimates, but conversely an “upside to the outer years” as if the project goes on for longer than planned, which could “result in an opportunity” given that it is a cost-plus contract.
Costain and Severfield would benefit from a green light given to an extension of the project to Euston, according to analysts.
A joint venture between Skanska and Costain, STRABAG JV, holds a £1.2 billion contract for the main works at Euston, requiring a 7.2-kilometre tunnel from Euston to Old Oak, which is expected to have “increased significantly” in value.
While Mace has a contract worth £2.6 billion to build a new station at Euston, analysts expect Severfield as the UK’s largest steel producer to be most likely positioned to win work.
Analysts say that the outlook for infrastructure remains positive, particularly in the water and energy sectors, while delays to HS2 only increase the value of the contracts further.
Balfour is expected to have “no material impact on the forecast horizon” by a possible cancellation of the second phase of HS2, as it is already contracted through to the early 2030s and is currently bidding on phase one.
Analysts say Keller has “lower exposure than most” and the extension does not affect its current works and contracts.
Likewise, at Severfield, scrapping phase two “would have no impact on estimates”, they say, as the company has not started to tender for work on the project.
There remains a £600 billion government infrastructure pipeline in the UK, and savings from HS2 could be reinvested in northern rail and road.
Liberum issued price targets of 475p for Balfour, 100p for Costain, 300p for Galliford Try, 1,340p for Keller, 150p for Kier, 2,100p for Morgan Sindall and 130p for Severfield. Costain and Severfield are broking clients of the company.