Diversity keeps Morgan Sindall defensively placed

There's no corner of commerce that hasn't been affected by the global economic slowdown, but Morgan Sindall's diverse revenue stream does at least leave the group looking better placed than most. Indeed, the company's operations are ranged across five core operating divisions - office fit-out, construction, infrastructure services, affordable housing and urban regeneration.

The construction side accounts for around one-third of group turnover and, while margins there are pretty thin, divisional pre-tax profit last year nearly doubled to £9.5m. Work comes through two operating units, Morgan Ashurst and Morgan Professional Services - Ashurst concentrates on education and health-related construction, while professional services is focused on design and project management. True, sentiment towards this side of the business won't be helped by concerns over potential future government spending cuts. But management believes that spending on health and education is most likely to escape the worst of any cuts in infrastructure spending. Indeed, public sector spending in the current year remains solid and, while the divisional forward order book is a little lower than at the start of the year, this is offset by an improvement in the pipeline of projects at the preferred bidder stage. The most recent successes include a £49m contract to build new student halls of residence at Reading University.

Meanwhile, Morgan Est is the group's infrastructure services arm and accounts for just under one-third of total turnover. The division operates primarily in the transport, water and energy sectors, with particular expertise in tunnelling and complex engineering projects. And bidding activity has enjoyed a significant increase, particularly for tunnelling business. The division has already secured its first utilities contract with Severn Trent, valued at £500m over the next 10 years, which should provide a decent level of forward earnings visibility.

And while the new-build housing sector remains in the doldrums, the group's affordable housing division continues to see a steady stream of new business from refurbishment and new-build social housing contracts. Operating under the Lovell brand name, demand for shared equity and rental accommodation looks set to remain strong for as long as first time buyers continue to struggle to enter the traditional housing market.

Still, activity within the group's urban regeneration operation has been subdued. Although two large schemes were secured during the first half of the year - one in Doncaster worth £300m over six years, and the other in Blackpool valued at £220m over the next 10 years.

The group's office fit-out operation isn't doing so well, either. That operates under the Overbury banner and provides interior fit-outs for the hotel, retail and leisure industries, while Backbone Furniture supplies and installs commercial office furniture. The forward order book here is broadly in line with levels seen at the start of the year, but management has already said that divisional turnover this year is likely to be down about 25 per cent year-on-year. Additionally, conditions look set to remain tough for some time. Indeed, analysts at RBS believe that turnover in fit-out will fall by 40 per cent in the second half - although Morgan Sindall has been busy cutting costs. So, at 4.7 per cent, the divisional margin in the second half is forecast by the broker to show little change from the first half's 4.9 per cent figure.

But Morgan Sindall does look better placed than its rivals in terms of its balance sheet strength. The group boasts a hefty net cash pile and £75m in banking facilities have recently been renewed through to 2012. Moreover, and even though the group's £3.6bn forward order book is down slightly from the beginning of the year, management is confident that earnings visibility will remain strong as contract work that's currently in the pipeline comes onstream.