Related
news
Shares Magazine
The UK construction and materials sector may go under the radar with investors but its recent performance warrants closer attention. In recent years, the market has drastically reappraised the potential for these businesses.
They are no longer perceived as poorly managed, low-margin contractors reliant on housebuilding for their revenue but instead as higher quality industrial companies with exposure to longer-term, more complex infrastructure and engineering projects.
A disconnect with the housebuilding sector
As the chart shows, this shift is reflected in the clear disconnect with the housebuilding sector, which has struggled at a time when the stock market fortunes of its construction counterparts have drastically improved, to comfortably outpace even the broader FTSE 350 index.
Part of this has been driven by changes at an individual company level as these businesses have engaged in self-help measures.
Historically the UK construction industry was prone to a lack of discipline when bidding on projects which left it saddled with loss-making contracts and resulted in some high-profile corporate failures. In the last five years or so, companies have shown greater discipline and made efforts to repair their finances.
Berenberg analyst Harry Goad says these firms are now moving to a new phase, “as the focus shifts from improving risk management, strengthening the balance sheets and demonstrating that they can deliver steady, cash-backed profits, to one of seizing the opportunities available in their chosen end-markets and effectively deploying capital to maximise returns.”
Goad adds: “There are certain segments within the sector’s end-markets that present significant opportunities to the construction contractors. These include the UK government’s 10-year Infrastructure Strategy, and the most recent regulatory determinations in water, energy and aviation – all of which involve significant increases in regulatory asset spending over the next investment period.”
Other areas of opportunity for construction companies might be found in transport, education and health, as well as defence and nuclear sectors which have come into increasing focus in recent years.
A North American boost
Meanwhile Keller, Balfour Beatty and Breedon all have material exposure to a North American market which is seeing bumper activity thanks to significant expenditure on infrastructure and, in particular, the data centres which are critical to the expansion of AI.
This is potentially a double-edged sword as any reversal in the AI trend could stymie the run of recent upgrades from the likes of Keller and Balfour Beatty.
As the table of valuations and performance in the sector shows, Genuit and Morgan Sindall trade on lower price to earnings ratios after a difficult period on the stock market for both over the last 12 months.
Genuit was hit by Budget uncertainty at the back end of 2025 and has suffered from increased costs in its supply chain in 2026. Particularly on oil-linked polymer prices given its position as a major manufacturer of plastic piping.
Morgan Sindall, which has an excellent long-term track record, has been hurt by concern about the partnership housing space, partly thanks to the woes of specialist housebuilder Vistry Group, and scepticism about the sustainability of its exceptional profits from office fit-out activity.
Strong balance sheets give companies options
Most of the big UK construction businesses now hold net cash on their balance sheets as a means of rebuilding credibility with investors, customers and suppliers.
With an improved backdrop and most stakeholders won over at this point, these businesses may have increased capacity to offer more generous shareholder returns in the form of dividends and share buybacks and/or have increased capacity to invest for future organic or acquisitive growth.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...