Construction Industry Revives In The UK; Are The Stocks Following Suit?

• Coronavirus has had a significant impact on the businesses of the construction industry
• Lately, the UK construction industry has witnessed improving levels of activity, but the employment levels have suffered a sustained decline
• In May 2020, construction output increased by 8.2 per cent on a month-on-month basis
• and IBST have seen a continuous improvement in their sales volume

As the devastating impact that Covid-19 continues to unleash on human beings and countries worldwide, its outreach has also touched commerce and business. COVID-19 has resulted in lockdowns and restricted movements in countries. Therefore, businesses have been impacted and so have operations and as a result, contracts and obligations are being revisited to assess the devastation caused by the deadly flu.

A new paradigm of evolution is prepared in the cauldron of vulnerability as the world gradually begins to recognise the promising finish to the present course of things. After a long battle with the pandemic, the world has already started enlisting a decrease in the contamination rate, springing forward the optimism. During the period, the human race has experienced a paramount degree of chaos followed by uncertainty, restlessness and sorrow as the pandemic grasped each new nation and district. Country by country appeared to imitate the similar circumstance of contamination, lockdown and despair, which were felt first in China.

New activity was particularly affected in the wake of Covid-19. Albeit, the majority of the states have re-opened, crucial economic parameters are still weak, including joblessness, income growth, and demand. Coronavirus also has had a significant impact on business across the construction industry. But a ray of hope can be seen in the present scenario.

Builders continuing to work after weeks of Covid-19 lockdown reflected a strong positive territory in the UK construction industry for the second consecutive month in a row in July 2020. However, despite the improving levels of construction activity, the employment levels have suffered a sustained decline as firms slashed jobs.

The IHS Markit/CIPS construction Purchasing Managers' Index (PMI) touched a reading of 58.1during July, in comparison to that of in June 2020, which read 55.3. April recording was as low as 8.2. Expansion in business activity is denoted by any reading above 50. The construction industry accounts for almost 6 per cent of Britain's economy.

The Economics Director of IHS Markit, Tim Moore, said that the construction companies took another step along the path to recovery in July with a bounce-back across house building activities, which has helped them in delivering the strongest overall growth across the sector for almost five years. The release of pent-up demand and diminished anxiety among clients prompted an improvement in construction activities. Civil engineering and commercial activity are also back in development, which has been mainly due to the restart of work that had been postponed during the second quarter of 2020.

However, with a sharp fall in staffing levels, that led to an increase in the number of redundancies, and competition for raw materials resulting in higher costs, problems are already starting to appear, just as the sector regains its strength.

Construction Activity Statistics

On 14 July 2020, the Office for National Statistics released the data relating to construction output for the month of May 2020.

• In May 2020, construction output increased by 8.2 per cent in the month-on-month all work series, followed by the record decline of 40.2 per cent in April 2020. Presently, the level of construction output is down to 38.8 per cent on February 2020 before the impact of the coronavirus (COVID-19) pandemic.
• In the three months to May 2020, construction output fell by a record 29.8 per cent, in comparison with the previous three-month period; reflected by record falls of 30.3 per cent in new work and 28.9 per cent in repair and maintenance.
• Record falls in most of the new work sectors; private new housing and private commercial were the largest contributors, falling by 42.5 per cent and 29.5 per cent respectively, reflecting a decrease in new work (30.3 per cent) in the three months to May 2020.
• The decrease in repair and maintenance (28.9 per cent) in the three months to May 2020 was due of the record falls in all repair and maintenance sectors; where the most significant contributor was private housing repair and maintenance, which fell by 39.8 per cent.

Impact on Construction Stocks

Taylor Wimpey PLC

The Company's production activity was significantly impacted by the Covid-19 pandemic, leading to an impact on the completion levels for H1 2020. The sites and sales centres were closed from 23 March, but the employees returned to site at reduced capacity between 4 May and 29 May. Sales centres re-opened between 22 May and 29 June, resulting in a material impact on the financial performance.

There was a decline in the total home completions (excluding joint ventures) by 57.6 per cent to 2,771 (H1 2019: 6,541). The Company saw an increase in sales rate from 0.30 (during shutdown) to 0.70 by June end, a 206 per cent increase in appointments booked, and a 50 per cent increase in website visits, year on year.

The coronavirus pandemic and the UK's exit from the European Union has left a high degree of uncertainty in the short term, especially on the employment front. Still, the demand has remained robust, and many customers are continuing with their home purchases.

Stock Performance

Taylor Wimpey PLC (LON: TW.) stock last traded at GBX 119.50 on 7 August 2020 before the market close, up by 0.97 per cent from its previous close. The 52-week low/high price was GBX 101.50/236.20. It was having a market capitalisation (Mcap) of £4,313.17 million. The volume traded at the time of reporting was 10,890,434. The Company recorded a negative return on price, which was 39.34 per cent on a YTD (Year to Date) basis.

Ibstock PLC

The Company witnessed a reduction in sales volumes from late March 2020, due to the construction and house building customers closed sites, and the government measures to control the COVID-19 mayhem began to take effect. For the three months to 31 March 2020, the Group's revenues decreased by around 10 per cent, with a decline of approximately 75 per cent in the two months to 31 May 2020. Now, the trading conditions have begun to improve as the construction and house building sectors have started to return to work over recent weeks.

The Group witnessed a strong balance sheet, with a rise in the capacity to invest in both organic enhancement projects and execute M&A opportunities. Further, the 'help to buy' scheme by the government has been supporting the local construction market. The Group has taken effective action to address the challenges presented by Covid-19 crisis. Continued recovery has been evident in the demand patterns in July. The clay sales volumes were recorded at around 80 per cent and concrete sales volumes at approximately 85 per cent of prior-year levels.

Stock Performance

Ibstock Plc (LON:IBST) stock last traded at GBX 162.40 on 7 August 2020 before the market close, up by 1.44 per cent from its previous close. The 52-week low/high price was GBX 146.90/322.20. It was having a market capitalisation (Mcap) of £655.71 million. The volume traded at the time of reporting was 1,713,604. The Company recorded a negative return on price, which was 49.57 per cent on a YTD (Year to Date) basis.

Conclusion

The Covid-19 pandemic has turned into a global crisis, evolving at high speed and scale. None of the industries is immune to this crisis, and construction and house-building companies are no exception. While they are taking preventive measures to preserve the integrity of their operations and protect their people from being unemployed, a continued government support would be required to withstand the unprecedented times.