What's new
■ More contract wins for Lovell housing division
■ Order book steady at £3.2bn
■ Urban regeneration building strongly
Like all companies in the construction and maintenance sector, Morgan Sindall has had to deal with a difficult trading environment that has imposed a relentless squeeze on margins as companies compete for a shrinking pile of work. But the group's diverse revenue stream is proving to be a useful buffer against the squeeze on spending.
The affordable housing business, which operates under the Lovell banner, has continued to generate new contracts. Typical of the work being won is a £50m 10-year contract secured with Accord Group, one of the largest West Midlands housing associations, for which Lovell will provide a round-the-clock reactive repairs service for 11,000 affordable homes. And the division's order book remains impressive at £1.5bn. Urban regeneration work, where the group works with landowners to unlock value from under-developed urban land assets and to bring about urban renewal and regeneration, is also developing strongly as more land is released for development. Morgan Sindall also has a specialised fit-out unit and, while the current market is slow, the outlook is better because over 1m sq ft of new office space is expected to become available in London in the next couple of years.
The group is still active on the pure construction side, but intense competition means that management is becoming increasingly selective about which projects to take on in order to preserve margins.
Liberum Capital says…
Buy. Project selectivity and tight cost control remain the key to mitigating margin pressure. Trading remains tough, so the group has done well to limit the decline in its order book from £3.4bn in December to £3.2bn. And, while there are no major contracts in the imminent pipeline, there are a number of possibilities, including the High Speed 2 rail link, the Thames Tideway tunnel and the Northern Line extension to Battersea, all of which could provide work for the group's specialist tunnelling division. Expect adjusted pre-tax profits this year of £44m and fully diluted EPS of 78.4p (£45.3m and 81.4p in 2011).
Numis Securities says…
Buy. Morgan Sindall is one of our buy selections, thanks to its strong presence in urban regeneration, strong order book and decent yield. It is also well placed to benefit from an upturn in construction activity, and we believe such an upturn may not be far away. While UK construction activity has fallen 40 per cent from its peak, this process may be nearing an end as central government realises the importance of spending on infrastructure to boost economic growth.
