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Fit-out and urban regeneration hailed at Morgan Sindall but almost £40m set aside for problem MoD contracts

Problem Ministry of Defence contracts at the Faslane Naval Base in west Scotland have cost Morgan Sindall nearly £40m in 2015 - £5m more than it had forecast in May.

In its half-year results today (see below), the group posted a loss of £27.2m including the problem contracts, a fall of 309 per cent on the same period last year (2014: £13m pre-tax profit).

An exceptional, non-cash charge of £39.4m has been written-down against earnings on the two deals with commercial settlement ‘in principle’ reached on one of the contracts.

The £39.4m sum has been set aside based on the resolution of one deal and is “based upon the Board’s best current assessment of the likely outcome on the other contract”.

Chief executive John Morgan said: “Construction & infrastructure continues to be impacted by the poor performance of its older and lower margin construction contracts in London and the South, and, whilst these are working through to completion, this is happening at a slower rate than previously anticipated.”

Projects in London and the South-east made a loss of £7m in the first half of the year.

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As a result of “ongoing poor performance”, Morgan Sindall has limited bidding activities in London and the South-east region to “mainly frameworks or bidding opportunities involving either investments or urban regeneration”.

In the construction & infrastructure business, revenue grew from £567m to £623m, but operating profit sank from £5.9m in H1 2014 to just £0.3m.

Excluding the problem deals, Morgan Sindall saw good performance, particularly in its fit-out and urban regeneration portfolio.

Adjusted revenue was up 15 per cent to £1.15bn, with pre-tax profit down 6 per cent to £13.3m (2014 H1: £14.2m).

It held its dividend at 12p, which analysts Liberum said “perhaps suggested some near-term caution”.

In fit-out, revenue increased by 53 per cent to £299m, while operating profit almost doubled to £10.4m (2014 H1: £5.5m).

Morgan Sindall’s margin increase from 2.8 per cent up to 3.5 per cent was attributed primarily to improved operational efficiency in project delivery, but also by improvement in negotiated terms on some projects.

Order Book (secured orders and frameworks)

The Group’s order book at 30 June was £2.6bn, a decrease of 3 per cent since the previous year end.

Affordable housing grew its order book by 9 per cent to £732m but fit-out was down from its high year end position of £241m to £201m.

The construction & infrastructure order book was down 8 per cent to £1,414m, which Morgan Sindall said reflected greater selectivity in tendering and the transition towards more two-stage tendering work.

The regeneration & development pipeline remained broadly level with the year end position at £3.2bn.

Urban regeneration revenue fell from £42m to £26m but delivered an increased operating profit of £5m (2014 H1: £3.5m).

Deals included completions in the first phase of the ISIS residential scheme Brentford Lock West (a joint venture with the Canal and River Trust), further residential sales from the Vimto Gardens development (part of English Cities Fund’s (ECf) Salford Central regeneration scheme - a joint venture with Legal and General and the Homes and Communities Agency) and the sale of remaining units in phase two of ECf’s Rathbone Market scheme in Canning Town.

Chief executive John Morgan said: “We’ve seen a strong performance from fit-out in the first half and urban regeneration continues to deliver good growth as a result of our focused and long-term investment in the development portfolio.  

“However, it is expected that fit-out will produce a further strong performance in the second half, with urban regeneration and affordable housing both making good progress.”

Morgan Sindall results HY 2015HY 2014% change
Operating profit – adjusted1£15.5m£15.2m+2%
Profit before tax – adjusted1£13.3m£14.2m-6%
Earnings per share – adjusted124.5p28.6p-14%
Period end net cash/(debt)(£8m)£34m 
Average net debt(£35m)(£6m) 
Interim dividend per share12.0p12.0p-
 ‘Adjusted’ is defined as before intangible amortisation (£1.1m) and exceptional operating items (£39.4m) (HY 2014: before intangible amortisation (£1.2m   
(Loss)/profit before tax – reported(£27.2m)£13.0m-309%
Basic (loss)/earnings per share – reported(49.4p)26.5p-286%

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