In the three years before the pandemic, there were some companies in the construction sector where profit warnings almost didn’t come as a surprise.
Whether Galliford Try Holdings PLC (LSE:GFRD) was one of that number through bad luck, bad judgement, or a mix of the two, is a moot point now, as the new management team have started a turnaround designed to make the business reassuringly predictable for investors.
It is coming up to two years since the leadership team of chief executive Bill Hocking and finance director Andrew Duxbury was put in place after the sale of the group's housebuilding arm and under the pair, the Uxbridge-headquartered group has just completed its first full financial year as a standalone construction business and set out a new sustainable growth strategy.
Carving out the housing business gave Hocking and Duxbury a strong balance sheet and a new start.
They have used the opportunity to reset the business and remould it with the values they see as essential to compete in the construction sector, refining the operating structure, investing in the workforce and focussing on the company culture.
“Building a really strong foundation with those elements was essential to give us the platform for sustainable growth,” says Duxbury.
The timing has been good too, with the completion of this rebirth coinciding with a market that is seeing significant government and private sector investment into UK social and economic infrastructure.
While it may be tempting to ignore the past as we rush towards the reassuringly unexciting present, it’s instructive to know why management have remodelled the company.
Investors who bypassed Galliford Try in the past might have done so because the company, like many others in the construction sector, perhaps chased contracts that offered juicy revenues but left a sour taste.
“Risk management is now one of the key watchwords of the company’s culture,” says Duxbury, “from the contract tendering process right through to final delivery.
“It’s all about taking on the right contracts and having an organisation where we've got a real cultural alignment across the whole business around risk management and around the need for that sort of discipline.”
As Duxbury emphasises, this buy-in through every department is not just management box-ticking, but ensures that the company does not lump itself with any of the sorts of contract issues that it has made a great effort to rid itself of in the last two years.
“What it means is that every contract we now have in the order book is one we really understand, we know that we can deliver, and deliver it predictably to high-quality clients, with the right financial metrics,” he adds.
“And what helps is that we see a market which is supporting our growth aspirations.”
Alongside September’s full-year results, Hocking and Duxbury set out what they called the company’s new sustainable growth strategy.
The strategy focusses on driving a progressive culture, socially responsible delivery, and quality and innovation to deliver sustainable financial returns. By 2026, the target is to grow operating margins from last year’s 2% to 3% as sales grow from just over £1.1bn towards £1.6bn, allowing a sustainable dividend with cover in the range of 2.0-2.5 times earnings.
“Of those targets, the operating margin growth is more important,” Duxbury stresses. “And the reason is that it's about taking on the right work.
“Construction companies can easily grow their turnover by just signing up to all sorts of projects, and then they spend the next three, four, five years paying the price.”
Taking on the right work is made somewhat easier by a very supportive market, where potential opportunities are apparent across all sectors in which the company specialises: health care, education, defence and custodial, as well as economic infrastructure such as highways, water and wastewater.
This is allowing Galliford a greater ability to pick and choose the right sort of contracts.
The sale of the housing arm last year also strengthened the balance sheet, which is a requirement for almost all government and private sector clients after the Carillion and Interserve disasters of not-that-distant memory.
“Most of the work that we tender for, the biggest criteria of winning the work is not price but quality criteria,” says Duxbury.
“This includes sustainability issues, a strong balance sheet, your team, your resources and your track record.
“And the reason this is also very important for us, is we want clients who we can develop a sensible long-term relationship with. It is about delivering best value for clients, not just chasing the lowest price.”
Increasingly, government procurement departments are using something they call the Construction Playbook, which was published this time last year and sets out criteria for procuring construction services, including requirements for sustainability credentials such as a published carbon reduction plan, best construction practices, balance sheet strength, investment in people and other ‘social value’ metrics.
“There are various mechanisms by which they quantify social value,” says Duxbury. “For example, how many local people will be employed through the construction phase, that sort of thing.”
“And the fact these kinds of measures are increasingly important in winning work is good, because those are all the things that are important to us as well.”
“It shows investors that sustainability is interwoven throughout the way we operate and that it is not a separate part of our strategy.”