Brexit risks, construction, including no-deal, tariffs, market and currency volatility, staff

Laing O’Rourke Corporation Limited – Annual report – 31 March 2018

Industry: construction

The referendum decision to leave the European Union has created political, economic and financial uncertainty that will play out for the period to 29 March 2019 and beyond. Recent events, particularly the political turmoil, has highlighted many unanswered issues and it is inevitable that Brexit will have an impact on UK business.

The Group initiated a Brexit risk review in 2018 with the primary aim being to map out and analyse the potential challenges that may result from the UK’s withdrawal from the European Union. Bearing in mind there are several options and variants of Brexit still under consideration by the UK government, the business decided to concentrate our risk analysis on three options.
1. Leave on 29 March 2019 with a deal.
2. Leave on 29 March 2019 with no deal.
3. Extend the date of leaving to a date after 29 March 2019.

Experts, economists and analysts anticipate market and currency volatility in the short-term, however, any long-term impact will depend heavily on the detail of how the UK manages its participation, in whatever option, in the EU post 29 March 2019. The Group has concentrated its highest risk assumptions on a scenario where the UK leaves the EU with no deal.

Laing O’Rourke has analysed its current order book and pipeline and this review supports an assessment that, to date, a “no-deal Brexit” would present minimal, if any, risk to current projects and liquidity forecasts. The business has also considered implications for the sector and, to date, has not identified any negative impact on the UK construction market either in the traditional built environment or infrastructure sectors. We are concluding that, based on evidence to date and assuming the sector’s clients continue with their projects, there are minimal risks to liquidity forecasts arising from any deterioration in revenue.

The business has conducted a detailed review of its staff and workforce with a full analysis across primary job families. Based on the most recent data, 16.1 per cent of the total UK headcount are EU citizens and 23 per cent of that total are Irish citizens who have the full ongoing right to work in the UK. This risk assessment has highlighted a dependency on EU nationals in certain job families and the business is monitoring developments in these areas, however, it is clear that earnings and rewards are such that it does not present a significant risk to staff retention, staff recruitment or the ability to comply with the minimum earnings threshold for securing visas.

The UK business buys assets such as tower cranes as part of its core business and has conducted a detailed analysis on potential tariffs based on the past 12-month record of direct imports from the EU and possible registration procedures available to mitigate import supply difficulties. No tariffs apply under WTO rules to the import of tower cranes and it is assumed that additional customs procedures will create delays of no more than seven days. Apart from construction capital assets, the level of direct EU imports is low and the estimated additional costs arising from a “no deal Brexit” are deemed to be immaterial.

In summary, there has been no change to the Group’s work-winning methodologies, or material negative impact on current live projects or staff recruitment and attrition. However, with the political environment continuing to develop, few companies can declare themselves immune to the risks of withdrawal from the EU. The Board will continue to monitor developments in the UK business and political environment, and remains vigilant to the need to respond to changes in market conditions such as freedom of movement, finance and tariff implications, disruption to supply of plant and equipment and key construction components, logistics, exchange rates and primary commodity prices as we approach 29 March 2019, and for the period immediately after any other withdrawal date.

The Group has faced up to the challenges encountered in the 2018 financial year, not only by refinancing its businesses, but also continuing to embed new processes and controls on project selection, operational delivery, and risk and assurance.

Our Deliver 2025 strategy and 2019 financial year-end plan is predicated on continuing with our plan to implement our successful business model, to sell non-core assets and a smooth Brexit transition with no significant delays or disruptions to projects and our supply chain.

As a result, the Board has considered the Group’s financial requirements, based on current commitments and its secured order book, as well as the latest projections of future opportunities, against its banking, surety bonding arrangements and its current refinancing plans, and has concluded that the Group is well placed to manage its business risks and meet its financial targets successfully.