Many British businesses have been stockpiling hard ahead of Brexit. But not Greybull, the self-styled corporate turnround specialist that has owned British Steel since buying it for £1 from Tata of India in 2016. It has not just failed to hoard; it has actually managed to reverse-stockpile.

Like many energy-intensive businesses, British Steel requires so-called carbon permits to carry on its business. It receives allocations each February from the Emissions Trading System, which issues them, based on its historic emissions. BS then utilises the permits during the year and settles up the balance the following April.

Thanks to past decarbonising efforts (achieved through a mixture of efficiency gains and production cuts), BS receives more permits than it uses annually, offering a small cash flow fillip at the end of the year. But at some point in the past, the company flogged off pretty much its whole entitlement — essentially borrowing from the ETS and using the following year’s grant to redeem the debt.

Two things have conspired to call time on this particular permit rollover. The first is Britain’s failure to sign the Brexit deal prior to March 28, which has led the EU to refuse to grant new permits to UK participants until the country’s formal departure. At the same time the price of permits has rocketed, up by 91 per cent to more than €26 over the past year. That notionally leaves BS facing a bill of about £100m just to keep pumping out the emissions that come with steel.

Curiously, despite these figures, the rollover might not actually have been a bad deal for BS, depending on when it flogged all the permits. Say it sold 5m in 2008, the year after Tata bought Corus, that could have raised BS £107m. Paying back £120m in 2019 (the cost of repurchase) looks like cheap 11-year money. But if it did the deal in 2013, the maths are horrendous; it would have raised only £16m.

None of this now matters to Tata, which exited in May 2016; a month before the Brexit referendum and when permits were hovering around €5.50. But it is a slap in the face for Greybull, whose less than successful turnrounds of the UK retailer, Comet, and Monarch Airlines were generally accompanied by such generous bungs from the selling shareholders that they exempted it from any pain. With a deadline of April 30 to cough up or face fines, BS is now bidding for government assistance to tide it over Brexit.

A company that failed to procure enough widgets would not get special help from the government. Greybull should be no different. Any pecuniary assistance offered should be on the most stringent commercial terms.

Galliford Try to retrench

Ballast sand, a mix of sharp sand and stone, is used in the construction industry to strengthen concrete, writes Kate Burgess. Take one part concrete to six parts ballast to lay a terrace. Increase to eight parts ballast to reinforce foundations and footings.

Galliford Try has long talked of using its construction arm as ballast to fortify profits — one part contracts to nine parts housebuilding. The profit margins on contracts are wafer thin but they generate cash that is useful as a counter to housebuilding, which needs land and is both cyclical and capital-intensive. Galliford’s returns on capital tower over purer housebuilding rivals.


However, Galliford Try misjudged the mix. Five years ago it took on too many fixed-price all-risk contracts to build complex infrastructure projects, betting that the skills shortage would ease and margins would improve. They didn’t. Now Galliford’s shares are trading at under five times earnings and yield 10 per cent-plus in dividends.

That is even before Tuesday’s shock warning and a 20 per cent fall in the share price. Graham Prothero has hardly had time to swap his finance director’s hard-hat for the chief executive’s before cautioning analysts to cut pre-tax profit forecasts for the year to June by at least a fifth to about £120m. This is largely because of a last-minute bill for snagging on the contract to build the Queensferry Crossing over the Firth of Forth.

It is hard to see how much lower Galliford’s construction arm can fall. The company had to raise £150m in cash last year to cover the shortfall on its joint venture with Carillion and Balfour Beatty to build the infamous 90km Aberdeen bypass. HSBC analysts reckon that project alone has cost Galliford more than £200m in cash.

In total, construction contracts made £16m in operating profits on £1.5bn of revenues in 2018. Building homes and social housing brought in the same in revenues and nearly 15 times more in profits.

It must be tempting for the board, which talks of shrinking the business, to throw in the contracting towel entirely.

However, construction may still be a useful ballast as the housebuilding cycle heads into a downturn. The board just needs to work on improving the mix of sand, stone and concrete.

Carbon credits: jonathan.ford@ft.com

Galliford Try: kate.burgess@ft.com

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