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Margin squeeze predicted

The chief executives of Carillion and Interserve have conceded that the days of 3 per cent UK construction margins are over for the foreseeable future.

Carillion’s construction operating profit - including Canada and the UK, but excluding the Middle East - rose from £41.2 million to £57.9m in the year to 31 December 2011 with operating margin hitting 3.1 per cent.

This was despite a 17 per cent fall in revenue from £2.23 billion to £1.84bn, in line with the firm’s strategy to shrink its UK construction arm by a third.

Interserve blamed a bumper 2010 for a 26 per cent drop in UK construction operating profit from £24.5m to £18m, with revenue down 3.1 per cent to £731.1m. UK operating margin fell from 3.2 to 2.5 per cent.

Chief executives Richard Howson of Carillion and Adrian Ringrose of Interserve told H&V News they are heading for a return to “usual” margins of about 2 per cent in the years ahead.

Mr Howson told CN: “It is a very good performance, but it’s principally as a result of a number of large contracts that have either ended or are coming to completion.

“We think we will probably have a good margin, though not quite as good, in 2012.

“On to 2013/14, we will be back to usual margins around 2 per cent.”

Mr Ringrose told CN that his firm’s long-term average is 1.5 to 2 per cent. “The profit contribution in the near term will go down, it will get worse before it gets better - but it will get better.”

Both companies are growing their overseas construction businesses and support services. Carillion is targeting £1bn turnovers in Canada and the Middle East.

Its support services operating profits rose 9 per cent from £110.4m to £120.8m, with revenue up to £2.34bn.

Overall, Carillion posted a 15 per cent fall in total pre-tax profits from £167.9m to £142.8m after the £268m takeover of energy services firm Eaga, on flat revenue of £5.1 billion. The total order book is £19.1bn.