Morgan Sindall thrives despite tough economic times

For Morgan Sindall (MGNS), cash is king. The construction company has long prided itself on its net cash position and chief executive John Morgan isn't wrong to say this is especially important during an economic downturn. Its cash resources provide an advantage over the field, as some competitors do not have the ability to invest as readily when the economy is going south. That may explain why the business has £63mn less cash on its books than it had at the equivalent point last year, but Morgan says the company always aims to have at least £200mn in its coffers.

There are other reasons why the company has managed to grow in spite of the economic climate. The first is that materials are often bought a year in advance, meaning that the rise in construction costs has not had as big an impact on its business as it could have. This does not make the business immune to cost pressures, as it will need to buy materials for projects commencing in 2023, but planning ahead is wise given current uncertainties.

Demand is also reasonably healthy. Morgan Sindall’s regeneration arm as well as its social housing work with local authorities has been growing irrespective of the levelling-up agenda, which Morgan describes as “more chat than anything else”. As such, any change in government policy on this issue shouldn’t impact this side of the business. Meanwhile, office fit-outs are also on the rise as landlords attempt to attract tenants back to their buildings post-Covid with higher-quality spaces.

No business is completely safe from a weakening economy, but Morgan Sindall is doing better than most and the price tag of nine times consensus earnings provides a viable entry point, particularly given a prospective dividend yield of 5 per cent. Buy.

Last IC View: Buy, 2,200p, 24 Feb 2022