Another brick in the wall

Thu, 17 Apr 2008 09:37:35 GMT

They may have made a small fortune from Cityblogger, flogging him a new build toy house with walls composed of papièr maché and barely room to swing a hamster, let alone Tiddles, but he can’t help but feel a pang of sympathy for construction companies today. Or at the least their long-suffering shareholders. If life wasn’t difficult enough for these blighters, many of whom have seen their shares drop like a bag of bricks over the past year, the Office of Fair Trading is girding its loins to go after them.

112 building companies including Balfour Beatty, Carillion, Crest Nicholson, Galliford Try and ROK, are accused of price fixing. The racket apparently involves companies deciding amongst themselves who will win a particular local authority bid by one company bidding at a high price, but the other companies coming in much higher, ensuring the first company wins. The OFT claims one local authority paid £500,000 over the odds for a new primary school because of so-called ‘cover pricing’. The winning companies also allegedly paid ‘compensation’ to the losers. A number of firms have already squealed to the OFT and been granted leniency.

OFT investigations, while no doubt crucial, are the bane of investors’ lives. They can drag on for years and all the while hanging over companies like a black cloud, holding back share price growth. Even if the OFT ultimately decides that competition rules were not broken! Past investigations have included the dairy industry – which hit shares in Robert Wiseman – and the veterinary drug industry – affecting Dechra Pharmaceuticals. Both companies were cleared of wrong-doing, although Robert Wiseman, along with a handful of supermarkets, is currently under investigation again.

So investors will no doubt be beating their breasts. Tom Gidley-Kitchin, construction analyst at Charles Stanley, told Cityblogger he was taken aback by the extent of the price-fixing. “Call me naïve but I’m slightly shocked,” he admits. “I expected there was a certain amount of agreement [between companies] that clearly wasn’t acceptable. But the idea that firms were paying compensation to stay away from the bidding. I’m surprised. I hope there will be a clearing of the desks now.”

However, analysts at Numis Securities are more sanguine. Analyst Howard Seymour believes that because it will be companies’ regional divisions that are hit, fines are likely to be no more than £2-3m, rather than the tens of millions some press stories predict.

And Mr Gidley-Kitchin remains positive on the construction sector, despite problems in the house-building market. “There’s still huge demand for infrastructure, whatever happens in house building,” he says. He favours Balfour Beatty and Carillion because of their lower house-building exposure and exposure to PPP and international growth sectors.

And, on the bright side, the FTSE100 has made it through the 6,000 barrier once again this morning. Phew!

Technorati Tags: cityblogger,city blogger,office of fair trading,equity markets,building companies,OFT investigation into building companies,Balfour Beatty,Carillion,Crest Nicholson,Galliford Try,ROK,Robert Wiseman,Dechra Pharmaceuticals

del.icio.us Tags: cityblogger,city blogger,office of fair trading,equity markets,building companies,OFT investigation into building companies,Balfour Beatty,Carillion,Crest Nicholson,Galliford Try,ROK,Robert Wiseman,Dechra Pharmaceuticals

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Green shoots of recovery?

Tue, 26 Feb 2008 11:01:42 GMT

Cityblogger admits to having to pinch himself awake this morning. What do you know? The sun is shining, the sky is blue and finally, out of the abject misery of the credit crunch, two pieces of good news may have emerged.

Persimmon has stuck its wooden top above the parapet and is today claiming that…wait for it!…it actually may be seeing some green shoots of recovery in the stricken house building sector. The UK’s biggest house builder by market value, which is the first among its sector to report results, reckons it’s seeing more visitors to its homes and fewer cancellations. But let’s not get too carried away, for these are very much tender and fragile green shoots, susceptible to any hard frost. The company also warns that customers are still taking their time and dragging their heels in buying new homes. However, Persimmon’s chairman John White says the recent interest rate cuts have helped matters, with the “negative customer reaction to the credit squeeze during the autumn now…easing a little”. Broker Numis Securities called the results "reassuring", with shares in Persimmon up just under 2 per cent this morning to 777p.

But as they like to say in the City, one swallow doesn’t make a summer. The house building sector has suffered terribly over the past year, with many share prices halving due to the US subprime fallout and general house price malaise. Persimmon’s shares are down 47 per cent over the last 12 months, for example, while shares in Barratt Developments are down by 66 per cent. Ouch!

So before Cityblogger throws a house party he’ll be waiting to see what the company’s peers have to say when they report results, and whether a wider picture of a recovery can be painted across the entire sector. Encouraging news though, if we can dare to believe it!

Meanwhile, Timothy Besley, a policymaker at the Bank of England, has been busy telling the Daily Mail that he doesn’t think a period of house price slumps and lower consumer confidence will do the economy any long term harm. While he’s a bit worried about the inflation beast, he thinks a drop in consumer spending will allow people to regroup and strengthen their finances.

Cityblogger is heartened by Mr Besley's confidence that consumers will be at home making do and mending, rather than splashing out on Jordan's charming new credit card...