Morgan Sindall resilient against market challenges

Morgan Sindall’s (MGNS) shares rose by 10 per cent after the construction company revealed record annual revenues and adjusted profits despite the headwinds pounding the property market. The company’s top line, notably, now sits comfortably ahead of that of competitor Kier (KIE). And the bumping up of the dividend conveys management’s confidence in the outlook for this year.  

It wasn’t the biggest division – construction and infrastructure – that drove the revenue uplift. Sales there were only up by 3 per cent. Instead, the other four divisions picked up the slack, with each posting sales growth of at least a fifth. The fit-out segment, which focuses on commercial and government offices, led the way in absolute operating profit terms.

Of course, the business isn’t immune to property market and macro pressures. Secured workload fell by 2 per cent against last year. And the impact of higher input costs and supply chain issues was reflected in the operating margin performance. This fell across all divisions and was down by 20 basis points overall.

Management pointed to “contractual protection, operational efficiencies, flexible sourcing and (in the case of partnership housing) house sales price inflation” as factors that are helping to mitigate higher costs. 

A chunky net cash position also helps with financial resilience. This means that ad hoc problems such as a £49mn charge related to historic building safety issues in the year, which was behind the fall in statutory profits, isn’t the head-in-hands moment it might have been. 

Peel Hunt analysts said that there is “potential for positive earnings surprises” this year. Given this performance, that wouldn’t be a surprise. The shares are valued at seven times forward earnings according to FactSet, below their historic average. This is undemanding. Buy.

Last IC view: Buy, 1,986p, 4 Aug 2022