The government has given the green signal for construction work to begin on the High Speed 2 (HS2) railway line, sending shares in some construction companies rallying from their coronavirus lows.
‘Notice to proceed’ was given by the Department for Transport on Wednesday, which it said was needed to provide “a vote of confidence” for the sector during a time of great uncertainty because of the pandemic.
The government “cannot delay work” on the high-speed rail project any longer, said Andrew Stephenson, the DfT minister in charge of HS2, as the government published its 'full business case' for the project.
Following Boris Johnson’s approval of HS2 on 11 February, Stephenson said the formal signal for work to get going “provides thousands of construction workers and businesses across the country with certainty at a time when they need it”.
Because of the coronavirus lockdown, there has been little construction on-site in recent weeks, apart from the destruction of ancient woodlands and various wildlife habitats along the way, while HS2 has had to defend itself in the High Court of a challenge over whether the project fails to meet the government’s commitment to the Paris Agreement on climate change.
'Attractive' contracts
However, the four joint ventures will "start work immediately" on seven civil engineering packages, including their site preparation work and issuing sub-contracts, according to HS2 Ltd, the government-funded company responsible for developing and promoting the rail network.
The JVs, which were originally awarded framework-type contracts by HS2 in July 2017, include three where a listed construction company is one of the operators: one between Costain (LON:COST), Sweden’s Skanska and Austria’s Strabag, which is building the tunnels coming into the London terminus at Euston station; the four-way partnership of Kier (LON:KIE), France’s Eiffage, BAM of the Netherland and Spain’s Ferrovial; and the 50:50 JV between Balfour Beatty (LON:BBY) and subsidiaries of France’s Vinci. The fourth JV is between privately held Sir Robert McAlpine, France’s Bouygues and Dutch group VolkerWessels.
Analysts at stockbroker Liberum said they understood the terms of the contracts “are attractive with caps and collars limiting the risk of the supply chain, and limiting the cost to HS2”.
Costain said its JV's contract was worth £3.3bn, while Vinci confirmed its Balfour JV’s civil engineering lots were valued around €5.75bn (£5bn), adding that work should start in the summer 2020 and last 74 months.
Balfour Beatty said last month that its JV's two HS2 civil engineering packages would add the bulk of £3bn to its order book in the first half of 2020.
Kier, about which there has been some market concern about its financial strength, has a 35% share of its JV, which will deliver two civil engineering packages: C2 is the construction of the north portal Chiltern tunnels to Brackley and Lot C3 is for the Brackley to Long Itchington Wood Green tunnel south portal.
Market reaction
The added certainty certainly helped Costain, as its shares shot up 54% to 84.86p, while the news was shrugged off by investors in Balfour and Kier, where the shares were down 2.5% to 242p and 5% to 78p respectively.
Looking at the Costain JV, the Liberum analysts said the contract was awarded “despite concerns about its financial strength, noting concerns also about the financial strength of other suppliers like Kier,” analysts at Liberum said, adding that stand-by under-writing “may have helped”.
Given the delayed start due to Covid-19, the analysts forecast zero profit contribution from the JV for Costain in the current financial year, rising to £160mln and £200mln of additional revenues and £4mln and £7mln of additional underlying profit in the 2021 and 2022 financial years.
The High Speed 2 rail line, which has attracted criticism over the destruction of ancient woodland and questions over whether the massive spending will produce worthwhile benefits, is due to begin running trains in 2028-2031 depending on the construction timetable.