Morgan Sindall's revenue keeps growing

In one sense, it was business as usual for Morgan Sindall (MGNS). The construction company posted its highest-ever sales in its results for the 2023 calendar year, having increased them consistently for a decade.

In another sense, this is a business in recovery. Higher interest rates in 2022 made real estate developers nervous, which pushed Morgan Sindall's property services business into the red in 2023. The shares have been heavily marked down since a peak in 2021, likely as a market reaction to this. We believe this was an overreaction, with the diversification of its revenue streams into non-cyclical building projects such as social housing, infrastructure, and regeneration work continuing to bring in cash.

Although MGNS's share price climbed throughout 2023, we still believe this undervalues the growth potential of this business. The company has prudently stocked up on net cash during a period of high interest rates, giving it plenty of room to invest when the market recovers. And with interest rate stabilisation giving confidence back to real estate developers, that recovery looks likely to happen this year or next. Throw in further growth in its rock-steady non-cyclical revenue streams, and it looks like 2024 will be another good year for the business.

As is common at construction companies, the bear point for Morgan Sindall is its wafer-thin operating margin. Of course, thin margins also mean rivals cannot easily swoop in and do the job for less.

Consensus forecasts from FactSet are less bullish, predicting earnings and dividends per share will fall back this year. Yet the price/earnings ratio remains undemanding at nine times forecasts for 2025 and 2026. Buy.

Last IC View: Buy, 1,899p, 3 Aug 2023