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Morgan Sindall sees cash and revenue increase but profits slump 59 per cent

Problem contracts have contributed to a 59 per cent slump in pre-tax profits at Morgan Sindall, where margins have hit 1 per cent in its construction business and 1.6 per cent overall.

In its full year results to 31 December 2013, revenue was up 2 per cent at almost £2.1bn with a committed order book at year-end of £2.4bn – a rise of 8 per cent on the previous year, reflecting an increase in opportunities in the market more widely.

Its profit before tax, after problem contracts were taken into account, was £13.9m – a fall of 59 per cent on 2012 (£34.2m).

Exceptional operating items of £14.7m have been charged in the year in relation to the four old construction contracts, of which £13m was identified at its half-year stage.

Net cash improved to £69.7m, having halved from 2011 to 2012 to just over £50m. Its average net debt improved to £19m from £40m.

The company’s construction and infrastructure order book slipped by 1 per cent and fit-out by 16 per cent, but affordable housing (25 per cent) and regeneration (120 per cent) have shown significant increases.

Its improved cash position and investment in affordable housing and urban regeneration has led analysts Numis to tip the firm for better times ahead.

Howard Seymour at Numis Securities said the analyst expects a £3m hit to profits in 2014, but is tipping the contractor to record an 18 per cent uplift in profits in 2015 as it pointed to investment in affordable housing and urban regeneration as positive.

He said: “We expect 2014 to be a period when management invests into AH and UR.

“The impact of the higher average debt (which we estimate at £50m this year after a strong performance in 2013 when average net debt fell from £40m to £19m) will be £2m on the net interest line.

“Coupled with a £1m downgrade due to ongoing challenges in the Response Maintenance operations, this reduces our 2014 PBT estimate by £3m.”

Construction represents 92 per cent of group revenue, including construction & infrastructure (59 per cent), fit-out (20 per cent) and affordable housing (13 per cent).

The remaining 8 per cent is in regeneration, where its regeneration and development pipeline, an area of key interest for the group, has swelled by 23 per cent year on year to £3bn.

Adjusted operating margin was at 1.6 per cent across the group, down from 2.3 per cent.

In construction, adjusted operating margin was at just 1 per cent, down from 1.7 per cent in 2012. Fit-out margin was steady at 2.6 per cent, while affordable housing saw a slump from 3 per cent to 2.3 per cent.

Urban regeneration margin fell from 2.7 per cent to 1 per cent.

Analyst William Shirley at Liberum said: “The outlook for 2014 is mixed: the bulls will point to a rising order book (+8 per cent), the future benefits of investment and ever closer recovery.

“Our concerns relate to rising net debt (increasing the possibility of an equity raise), risks around margin as costs rise faster than tender prices, and an empty PFI pot.”

Morgan Sindall is aiming to secure more complex and long-term projects that offer enhanced returns through strategic alliances, frameworks and working collaboratively across the group.

Highlights in its Urban Regeneration division included £200m of new development agreements secured on major regeneration schemes in Aberdeen and South Shields, and being selected in November as Lambeth Council’s partner for a project across three sites in Brixton town centre, with a value of around £140m. 

Planning consents have been secured on seven major projects with a total development value of £140m and construction has started on 13 new sites.  

Its net finance expense increased to £2.3m, up from £1m, which was impacted by lower interest from joint ventures, higher bank fees and an unwinding of the discount on deferred consideration, which together more than offset the benefit of a lower net interest charge on lower average net debt.

The adjusted earnings per share of 60.9p and fully diluted adjusted earnings per share of 60.0p were both down 34 per cent on the previous year.

Exceptional operating items of £14.7m have been charged in the year in relation to four old construction contracts held on its balance sheet.

At the half year, an impairment of £13m was made in respect of these items, which was based on an assessment of progress made at that time towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery. 

During the second half, there has been commercial resolution achieved on one of these contracts, while another has been impaired to reduce the carrying value to nil. 

In relation to the remaining two contracts, the board said it was appropriate to provide against these balances to an amount it considered was a balanced estimate of overall likely resolution, based upon its current assessment of progress made towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery.

After exceptional items, its reported profit before tax for the year was £13.9m (2012: £34.2m). Basic earnings per share was 35.4p (2012: 72.5p).

The ongoing focus on cash and working capital management has continued to deliver positive progress. 

Operating cashflow of £14.9m was generated, compared with an operating cash outflow of £42.7m in the previous year. 

A key component of this is working capital, where a working capital outflow of £8.4m in the year compared with an outflow of £76.9m in 2012.

During the period, the group has increased its committed banking facilities to take advantage of investment opportunities. Total committed facilities are now £140m, of which £110m expire in September 2015, £15m in May 2016 and £15m in September 2016.

The final dividend of 15.0p per share has been held level with the previous year, resulting in a total dividend for the year of 27.0p (FY 2012: 27.0p).

Chief executive John Morgan said: “2013 has seen challenging conditions predominate across most of our markets, with competitive pressures impacting on margins and profitability.

“Notwithstanding this, the positive operating cashflow generated by the business has allowed us to make further investment in strategic assets, key skills and resources, which positions the group well to benefit from future growth opportunities.

“Looking ahead to 2014, although there are signs of improving conditions in some of our markets, it is anticipated that upward pressure on supply chain costs and skills availability will provide additional management challenges.

“Against this backdrop, we remain confident that our robust order book and ongoing disciplined approach to contract selectivity will support the delivery of growth in this year and beyond.”

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