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Morgan Sindall 'no longer about cost-cutting', claims chief exec

Morgan Sindall’s chief executive has insisted the contractor is “no longer about cost-cutting, it’s about preparing for growth” despite falling profits and margins in its first-half results.

Speaking to Construction News, John Morgan was bullish about the firm’s finances and insisted conditions were beginning to turn for the firm, after a prolonged period of restructure (see box).

He said: “We will probably end the year with more people than we started with. We have seen some growth prospects. I don’t want to exaggerate it, but things are certainly not getting worse.”

In its half-year results, Morgan Sindall posted a year-on-year revenue increase of 2 per cent to just over £1bn, but pre-tax profits plummeted by 95 per cent to £1m in the first half of 2013 (H1 2012: £18.8m).

In construction and infrastructure, margins shrank to 1.1 per cent, down from 1.5 per cent in H1 2012.

“There is a bit of light at the end of the tunnel. Construction has been a pretty tough place to be, but things are beginning to improve”

John Morgan, Morgan Sindall

Asked whether margins would fall below 1 per cent, Mr Morgan insisted that some of the work won at better margins was taking time to come through the pipeline and that he expected improvement, but not in the second half of the year.

Although divisional revenue of £593m was 2 per cent up, operating profit shrank by a quarter to £6.4m.

Morgan Sindall half-year results Aug 13

Group finance director Steve Crummett told analysts he did not expect a further deterioration in gross margins as the firm moved into the second half of 2013.

But analyst William Shirley of Liberum Capital warned that margins in construction and infrastructure could still tighten.

“There is a very significant risk that margins will drop below 1 per cent,” he said. “Supply chain costs have already started to rise in some areas, so if you are bidding on the same prices that you were a year ago there is a very real risk.”

“We need to maximise efficiencies, but we must ensure that we don’t go too far here and leave ourselves exposed”

John Morgan, Morgan Sindall

The reduction in gross margins (8.1 per cent in H1 2013, down from 9.3 per cent in H1 2012) across the business led to an £11.6m profit hit in H1, but Mr Crummett added his voice to that of Mr Morgan when warning about further cost-cutting measures.

He said: “We are constantly looking at our cost base, but my concern at the moment is to make sure that we don’t actually go too far on cost.

“We need to cut our cloth accordingly and maximise efficiencies, but we must ensure that we don’t go too far here and leave ourselves exposed in terms of resources and skills and then we’re unable to respond to market opportunities as they arise.”

On his return as chief executive:

John Morgan has said he is “really enjoying” his return to the helm of Morgan Sindall after 12 years and insisted that “things are beginning to improve”.

In November last year the chief executive took back the role he vacated in 2000 to become executive chairman.  

The move saw the departure of then chief executive Paul Smith, who has since been made chief operating officer of Willmott Dixon’s support services division.

The announcement was made shortly after the contractor confirmed it would close offices in Ashford, Banbury, Bristol, Durham and Theale (Reading) as part of a restructure.

Morgan Sindall’s housing arm Lovell announced last year it would merge five divisions into two.

Group finance director Steve Crummett then replaced David Mulligan in April.

Mr Morgan said: “I have had a great time, I’m really enjoying it. There is a bit of light at the end of the tunnel. [Construction] has been a pretty tough place to be, but things are beginning to improve.”

Numis Securities analyst Howard Seymour pointed to the urban regeneration arm Muse – highlighted as a “big area of growth” by Mr Morgan – and fit-out as having potential for margin growth in 2014.

The firm is targeting regeneration opportunities in Leeds, Manchester and the South-east and is seeing greater interest overall outside London.

Affordable housing “continues to disappoint”, Mr Morgan said, after operating profit dropped from £7.5m to £2.7m year on year, while margins shrank by 2.2 per cent to 1.5 per cent overall.

Morgan Sindall’s affordable housing division Lovell acquired the majority of ongoing contracts and related assets of Connaught’s housing division for £28m in 2010.

He said the business would work in closer partnership with Muse and pointed to mixed-tenure housing as accounting for 24 per cent of revenue but 47 per cent of gross margin.

“I would question whether they will be able to grow affordable housing and whether they would be better off selling”

William Shirley, Liberum Capital

Its other affordable housing divisions – response maintenance, planned maintenance and new-build contracting – accounted for a total of 76 per cent revenue, but just 53 per cent gross margin.

Mr Shirley said: “I would question whether they will be able to grow [affordable housing] and whether they would be better off selling. However, the obvious two buyers – Kier and Mears – are currently pre-occupied with other acquisitions.”

Morgan Sindall took a £13m hit due to ongoing “problem contracts” which it said were historic and would not affect the business going forward.

Mr Morgan declined to expand on the nature of the contracts, which were described in the results as “amounts due from construction contract customers and trade receivables”.

“I think we have the advantage on bigger and more complex jobs… they are better in the long term”

John Morgan, Morgan Sindall

For future work, he said he wanted each business division to work more closely together and said London, the South-east and Scotland were all showing signs of growth.

Mr Morgan told analysts: “I think we have the advantage on bigger and more complex jobs. A lot of them take longer to win and get on site, but are better in the long term… there is more work about so we can be selective, but it’s all about the margins.”

The contractor is targeting transport (26 per cent of construction and infrastructure revenue) for growth, while water (14 per cent) and commercial (10 per cent) are strong areas of focus.

Asked whether Morgan Sindall would be reducing its presence in education (26 per cent) after it missed out on the new £4bn capital schools framework shortlist, Mr Morgan insisted the firm was “not looking to change market segments” despite the blow, and pinpointed roads as being a sector in which it expects to grow its market share.

Construction News revealed in February that Morgan Sindall would team with Balfour Beatty and Bam Nuttall to bid for around £1.6m of work on the Thames Tideway Tunnel, while it has been shortlisted for Scottish Water’s £1.5bn infrastructure investment programme in alliance with Carillion and MWH.

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