Buy ISG's full-throttle growth

According to BNP Paribas Real Estate research, central London office take-up in the first quarter of this year was up 46 per cent year on year. That revival is great news for ISG who is the clear leader in London's office fit-out market.

At the first half results in March, ISG said it was working on six major office fit-outs in London with a combined value in excess of £300m. The return of meaty fit-out contracts after several lean years drove revenues in this segment up 40 per cent in the first half to end-December.

The momentum has if anything strengthened in the second half. In February, ISG announced one of its largest ever projects; the high profile £125m fit-out of the new UBS office at 5 Broadgate in the City. Then, in May, six more 'major' office fit outs were announced with a combined value of £70m.

Alongside the revival in office fit-out, ISG also has a growing presence in fitting out data centres. A further two contracts with a total value of around £140m were announced just last month. All of which points to healthy momentum in the order book and profits when ISG reports full-year results in early September.

The improved trading conditions have allowed ISG to resume dividend growth. The payout was slashed in 2012 and held at the new lower level for two years. But at the first-half results, ISG announced a 3 per cent increase in the dividend. That makes what is already a solid Aim income holding even more appealing.

Life is not rosy everywhere for ISG though. The slow-going regional UK construction market continues to pose challenges. Revenues here fell 17 per cent in the first half with operating profit shrinking to a miniscule £0.1m from £0.7m last year.

ISG says there are signs of improvement in customer confidence, but margins will stay low this year as projects secured in leaner times work their way through. ISG says its UK construction margins will improve next year as better margins have been achieved on recent project wins.

Margins across ISG though are generally pretty unexciting. The fit-out division reported a 1.5 per cent operating margin in the first half. The Asian business saw the best profitability at 2.6 per cent. But these margins are not unusual for these types of businesses. Fellow support services company Renew (RNWH), for example, makes a 1.8 per cent margin in its construction division.