HS2 stocks: what companies can you invest in?
HS2 has been given the green light by the UK government. We have a look at what stocks are working on the project and how it could impact the economy.
What is HS2?
High Speed 2, or HS2, is the largest infrastructure project not only in the UK but the whole of Europe. The project involves rolling out a 345-mile rail network that will connect the cities of London, Birmingham, Manchester and Leeds, bringing high speed rail travel to 30 million people, which is almost half of the UK’s population. When fully operational, it will transport 300,000 passengers a day, or 100 million each year.
HS2 is ‘taking inspiration’ from Japan’s Shinkansen high speed rail line and follows on from HS1 that runs from London to Kent and connects to routes into the European continent.
HS2 timeline: when will it be operational?
The project is being constructed in phases as it so large and it has already suffered severe setbacks.
The first phase of the project involves running a high-speed line between London Euston and Birmingham’s Curzon Street station. This part has already been given the go-ahead by politicians and the bill approving its construction was given royal assent in 2017. The project has fortunately had the support of politicians from across the spectrum since first being proposed back in 2009 and, upon the first phase being put to the House of Commons, 399 MPs voted to give it the green light compared to just 42 that were against the project.
The original timeline envisioned phase one being completed and up-and-running by 2026, but that has now been pushed back to 2028-2031. UK Prime Minister Boris Johnson said that trains could be running ‘by the end of the decade’ – but only if work starts before the end of March 2020.
Phase two is split into two parts, neither of which have yet been approved by parliament. Phase 2a aims to extend the line from Birmingham to run north to Crewe, while Phase 2b would further extend that route to Manchester and add an eastern leg between Birmingham and Leeds.
While the fate of the second phase of work is still up in the air, the original plan was hoping to have it operational sometime in 2032 or 2033. But that too has been delayed and isn’t expected to happen until 2035 to 2040 – meaning HS2 won’t be fully operational for at least another 20 years, and many are justifiably dubious over the latest timetable.
One primary goal of the new HS2 line is to link up existing rail lines across the country. High speed trains will be able to continue their journey on existing lines, meaning they will ultimately be able to move on northwards to the likes of York and Newcastle on the eastern side while the western leg will continue to Liverpool, Preston and Carlisle before going into Scotland and forking off to end in Glasgow and Edinburgh. All in all, HS2 will link up 25 new and existing stations.
How much will HS2 cost?
There are estimates as to how much HS2 will cost, but the public is understandably sceptical about the project’s budget as it has already been blown out of the water on several occasions. The original forecast placed the cost of HS2 in the region of £20 billion but was raised to almost £43 billion by 2012 and £56 billion by 2015. The latest figure guesses the total cost will be in the region of £65 billion to £88 billion, but the deputy chairman of the government’s independent review of the project has warned this could balloon to as much as £107 billion.
There has been a multitude of reasons why the budget has had to grow over the years, but it ultimately comes down to poor planning and a lack of understanding over how complex a project of this size would be. Quite simply, the risks of the project and the slew of variables has been underestimated and more money has had to be factored-in – whether it be for extra tunnelling, building more noise barriers, or having to pay more to people that will see their houses demolished to make way for the line in the form of compensation. Plus, early construction work has already uncovered some unexpected surprises that also push costs higher, such as asbestos or archaeological discoveries that must be preserved.
To date, it is thought around £9 billion has been spent on the project and that around £56 billion has been put aside so far.
Why is HS2 so controversial?
As with most major infrastructure projects, HS2 divides opinion.
In the corner that favours the project, the argument is that a high-speed rail line can help rebalance the economy (or, as the prime minister puts it, ‘level up’) by linking the capital, the West Midlands Hub and the Northern Powerhouse. Quicker travel and increased capacity would mean people have more choices when it comes to where they can feasibly work, while companies can source talent from a wider pool of candidates. It also incentivises businesses to expand outside of the capital and the south east, encouraging them to move northwards. It is also set to create at least 30,000 jobs during the construction phase alone.
In the opposite corner that oppose the project, the main reasons people have been turned off the project is the ever-rising budget and the lengthy delays. They have rightly argued that the economic benefits of the project dwindle as the costs of it increase and argue that most of the benefits – if any – won’t be seen for decades. There are huge consequences for the environment too, with Greenpeace claiming that, while it understands the need for better transport links, the prime minister’s current plan meant he had the ‘the dubious honour of being this century's largest destroyer of ancient woodlands in the UK’.
There is a growing argument that the money could be spent on other solutions that could help solve the same problems that HS2 is targeting. For example, the mayor of Greater Manchester, Andy Burnham, has said a rail link that connects the west and the east in the north (between Manchester, Bradford and Leeds) could be a better option, even if he broadly supports HS2 as a whole.
‘While we support HS2 in principle, it was designed as a North – South railway and consequently has never offered right solution for new, modern East – West links at Manchester Piccadilly,’ Burnham said. He also argued that building HS2 up north (which is still not guaranteed to happen) ‘must not distract from the need to urgently upgrade our creaking Victorian railway’.
The prime minister conceded that it was a ‘controversial and difficult’ decision to approve HS2, but said soaring costs and lengthy delays shouldn’t put people off the economic benefits it can bring. ‘I cannot say that HS2 limited has distinguished itself in the handling of local communities. The cost forecasts have exploded, but poor management to date has not detracted from the fundamental value of the project,’ Johnson said.
As far as Johnson is concerned, there is little point in debating the cost overruns so far. Instead, his priority is to get a grip on the project to make sure costs don’t spiral out of control any further, that savings are made and that the UK, especially having left the EU, commits to major infrastructure projects that it needs to boost the economy and show it is open for investment. To do this, the prime minister has created a role that means HS2 now has a dedicated minister, which is, for now, still a vacant position that is yet to be filled.
It is unsurprising that HS2 has been met with such controversy considering the cost of the project and the long-term nature of it. It is not the first major infrastructure project to be delayed or blow the budget. Crossrail, which will be known as the Elizabeth Line when it eventually opens, was meant to be ready in December 2018 but is still not finished and working toward an ambitious target of launching services to sometime in 2021 – and it has gone over £2 billion over its original budget. Similarly, the Channel Tunnel was built over a year behind schedule and for over £2 billion more than first planned.
Will China help build HS2?
There are reports that China Railway Construction (CRCC), the state-owned and publicly-listed company that has been one of the main players in rolling out China’s own network of high-speed rail lines, has written to the company managing the project, HS2 Ltd, offering to assist with its construction.
According to a letter seen by Building, the Chinese firm has said it could build the project quicker and cheaper than current forecasts. The letter says a subsidiary of the Chinese firm, 16th Bureau, has offered a ‘turnkey’ solution to build the entire project in just five years at a fixed price that would be significantly less than current estimates.
The letter, signed by a CRCC representative, said it was also offering to deliver 420 kilometres per hour line speeds with ‘shortened journey times and increased capacity’ adding that it would fund ‘up to 80% of the project value’, Building reported. However, it also said that HS2 Ltd is thought to think the first phase of construction is too advanced to consider an alternative approach. Plus, transport secretary Grant Shapps has said the UK government has not been involved in any talks with CRCC.
What could this mean for HS2?
For now, there is no suggestion that CRCC will be working on HS2. The government has not been involved in any talks that have happened so far and even HS2 Ltd has thrown doubt on overhauling all the progress made so far to consider CRCC’s offer.
However, an offer to build it quicker and for less than currently planned can not be ignored by the government. Yet, it is also correct to be concerned about CRCC’s ability to deliver considering how differently things work in the UK compared to China. For example, Shapps has said the process of purchasing people’s homes to make way for the rail line is much more complex than what CRCC is used to.
If the government was to allow CRCC to provide a turnkey solution for the entire project, then this could jeopardise the involvement of other participants that are already involved. If CRCC helps with part of the work, then this would ultimately mean fewer contracts for those already working on the project, which are mostly from the UK and Europe. If the government decides CRCC shouldn’t be involved at all, then this would mean more work for existing players, but it will also heighten the focus on costs considering the apparent cost benefits being offered by the Chinese firm.
What companies are working on HS2?
HS2 is a critical infrastructure project that the UK construction industry is relying upon for long-term work, especially when other major projects are also up in the air like Heathrow’s expansion or building new nuclear power plants. There are numerous publicly-listed companies working on HS2, from the UK and abroad, and many have secured contracts together by bidding for them as joint ventures.
According to government figures, HS2 has awarded or is currently in the process of tendering work worth in the region of £13 billion to £16.2 billion as of mid-January 2020.
Below is a list of publicly-listed stocks in the UK that either have been awarded a contract already or are currently in the process of bidding for one:
- Balfour Beatty has won several major contracts under joint ventures with French firm VINCI. In total, the contracts are worth between £3.1 billion and £4.1 billion
- Costain has won work in joint ventures involving Skanska and Strabag, which, in total, are worth between £1.75 billion and £2.6 billion
- Kier has been awarded two contracts under a joint venture with Eiffage, which are worth between £1.3 billion and £2.2 billion
- Capita has been awarded one contract in a joint venture with AECOM. It is one of three joint ventures sharing the contract worth in the region of £280 million to £350 million
- Morgan Sindall is working with two other companies on a contract worth £300 million
- CRH’s subsidiary, Tarmac, is currently bidding on a contract under a joint venture with Max Bogl that will be awarded in near future. If secured, the work will be worth around £200 million
Below is a list of foreign publicly-listed stocks that have either won contracts or are currently bidding for one:
- French firm VINCI has been awarded three major contracts under joint ventures with Balfour Beatty worth a total of £3.1 billion to £4.1 billion
- Swedish outfit Skanska is working with Costain and Strabag on contracts worth between £1.75 billion and £2.6 billion
- Austrian firm Strabag is working with Costain and Skanska on contracts worth between £1.45 billion and £2.3 billion
- French company Eiffage is working under a joint venture with Kier on two contracts worth between £1.3 billion and £2.2 billion
- Spanish firm ACS Actividades has a subsidiary named Dragados that is working with another firm on a £1.65 billion contract
- Dutch business Koninklijke BAM is working with Morgan Sindall and others on a £300 million contract and is one of many companies working on a smaller contract worth £50 million to £100 million
- US firm AECOM has a joint venture with Capita that is one of three to be awarded a shared contract worth £280 million to £350 million, and another contract with four other companies that has not yet been valued but will be worth in the region of £10 million to £50 million
- Canadian company SNC Lavalin’s subsidiary Atkins has been awarded contracts alongside other companies worth between £262 million to £362 million, and is one of many on a shortlist for a new contract worth £230 million that will be awarded in the third quarter of 2020
- Swiss firm Lafarge Holcim and Austrian outfit Porr are both competing for a £200 million contract that is due to be awarded sometime this year
- German company Siemens, French firm Alstom and Spanish outfit Construcciones y Auxliar de Ferrocarriles are all currently bidding to procure the rolling stock for HS2. The contract will be awarded in the near future and is thought to be worth around £1 billion
Should investors gain exposure to HS2?
HS2 is set to be built, and paid for, over the next 15 to 20 years. This means HS2 represents an anchor project for the construction industry that helps to underpin their workload over years if not decades. The current focus is on sky-high costs and long delays, but it shouldn’t deter investors seeking exposure to the space as it ultimately means more work and money for the companies carrying out the work.
Confirmation that the first phase of work will go ahead has been beneficial for the construction industry. Balfour, Costain and Kier were among those to see their share prices rise when the prime minister confirmed HS2 would go ahead earlier this month.
The approval should mean more contracts are awarded going forward. Although there is still a lot of uncertainty surrounding the second phase of work, investors should expect a similar response from the stocks involved if it is approved because they are more than likely to be awarded contracts for that work too – so long as they impress with the initial work they have been given. However, more problems or delays could put pressure on HS2 stocks.
The construction industry is the biggest beneficiary whilst HS2 is being built, but the rewards of the project will be much broader once it is up and running. UK property investment firm Seven Capital says HS2 seems to have pushed up house prices in areas set to benefit from better transport routes, such as Birmingham. This has also had what it calls a ‘halo effect’ by attracting more businesses up north, with HSBC and Deutsche Bank among big firms to have set up new operations in Birmingham in anticipation of HS2.
There are a lot of angles for investors to take with HS2. It will affect sectors in very different ways, and this should provide opportunities. For example, the halo effect of HS2 will also spread to the likes of leisure and tourism, which is likely to benefit from better connectivity across the country. Meanwhile, it could have a negative impact on airlines that offer domestic flights in the UK as more people could choose the train over an airplane if the service is good enough, while providing more contracts for rail operators such as Go-Ahead Group or Firstgroup in the future.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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