For many global construction companies, expectations for the current year and the next 12 months can be defined as follows: Our company’s performance in 2020 will be significantly weaker than a year-ago.
However, we are planning to focus beyond 2020 and prepare ourselves for the recovery of economic activity in the areas that have critical importance for our business.
The first half of the year brought uncertainties related to the impact of COVID-19, including national and international lockdowns, as well as changes in operations required to implement new health and safety protocols. All these resulted in historically weak first and second quarters for construction companies globally.
However, the industry quickly responded to the new challenges and found ways to adjust and survive.
As a result, the second half of 2020, despite growing COVID-19 cases, is providing grounds for optimism and hopes for a recovery of the sector at the end of the year and in 2021.
Improvements in liquidity
In the early days of the COVID-19 crisis, many companies lowered their CAPEX programs.
Firms in the energy sector expected a significant drop in demand for oil and gas due to the overall economic slowdown.
At the same time, improvement of liquidity through the issuance of new debt and equity as well as decreases or terminations of dividends and repayment of more expensive debt, have been among the common financial responses by construction companies.
Paris-based Vinci SA is a global player in the sector that designs, builds, finances and operates infrastructure facilities in nearly 120 countries, while employing more than 222,000 people.
In the first half of 2020, VINCI reported a net loss of €294 million, comparing with a €1.36 billion net profit last year. The company’s consolidated revenues in the first half of this year dropped to €18.5 billion – approximately 15 per cent lower year-over-year mostly due to the negative impact of the second quarter.
This unusually weak performance resulted not from a flaw in the company’s business model, but rather from unique, pandemic-related circumstances. In the long run, the low bases of the second quarter financial and operating results will present an opportunity for faster business recovery.
In its report for the first half of 2020, the company’s management says it is expecting a bounce-back in 2021, assuming the situation with the coronavirus improves.
Healthier order books
One of the strong positive signs indicating recovery on the horizon is the company’s record order book.
As stated in the management report: “The Group’s order intake in the first half of 2020 amounted to €22.8 billion, a year-on-year increase of 10%. Order intake rose by 35% at VINCI Construction and 1% at VINCI Energies, while it fell by 13% at Eurovia. On a rolling 12-month basis, order intake was up 9% (+11% outside France and +6% in France), with increases of 21% at VINCI Construction, 4% at VINCI Energies, but a decrease of 4% at Eurovia.”
The increases were driven by major contracts won by the Group in Europe, including two works packages on the HS2 rail project in the United Kingdom, a contract for The Link building in Paris (La Défense business district) and several new contracts for the Grand Paris Express.
Uptick in construction material costs
On a broader scale, the company’s positive outlook is supported by a strong recovery in prices for construction materials such as aluminum, steel and especially copper.
Copper prices have not only returned to, but exceeded, their pre-pandemic peak at the beginning of 2020 by more than four per cent.
They are likely to remain at elevated levels for the next 12 months. Steel and aluminum prices have rebounded significantly as well since their dramatic drops in March and April, although not to the same extent as copper.
Global recovery in the prices for construction materials indicates a return to positive momentum for construction in 2021 and even late 2020.
The improving demand for new infrastructure projects is reflected not only in VINCI’s order books but by other major international construction companies.
For example, in its six-month report for 2020, Skanska group stated that its order bookings in construction, adjusted for currency effects, increased this year by 25 per cent.
Unfortunately, the pandemic remains a daily reality with cases continuing to grow globally. Nevertheless, most countries have decided to consider construction activity “essential” and are now less likely to lockdown the sector in the same way as at the beginning of this year.
Besides, improved testing and the potential introduction of a vaccine, combined with better health and safety measures, will limit future negative implications for the industry and help it regain strength beyond 2020.
Dmytro Konovalov has over 10 years of experience in equity research and analysis for global markets at leading international financial institutions.