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  • Writer's pictureMark Watson-Mitchell

Morgan Sindall Group – quality of earnings, balance sheet strength and profits growth going forward

The positive statement at last week’s AGM for Morgan Sindall (LON:MGNS) emphasises how undervalued this company is currently.

Operating across a wide range of markets, the Morgan Sindall Group, valued at £600m, is one of the leading construction and regeneration companies in the UK. It reports through its six divisions: Construction & Infrastructure; Fit Out; Property Services; Partnership Housing; Urban Regeneration; and Investments.

The group employs around 6,600 people and operates in the public, regulated and private sectors. Its strategy is focused on its well-established core strengths of construction and regeneration. Each division is aligned and resourced to meet demand from population growth, the housing shortage and infrastructure capacity.

Looking down at its various subsidiaries, their names are well known and visible on numerous sites.

The Morgan Sindall company offers national design construction and infrastructure services to a broad range of private and public sector clients.

Its Overbury subsidiary is a specialist in office refurbishment and fit out, working with clients directly through their professional teams.

Morgan Lovell is the UK’s leading workplace strategy, office design and fit out specialist. With one point of contact, the company can define, design and deliver entire office interior projects.

The Lovell subsidiary is a specialist in the design and build, refurbishment and maintenance of homes and the regeneration of communities across the UK.

Morgan Sindall Property Services provides a full-service range of facilities management, planned and responsive repairs to social housing providers and public buildings under contract PFI, one-off and framework agreements.

Muse Developments works with both landowners and the public sector to bring about sustainable regeneration and urban renewal through the delivery of mixed-use projects.

Morgan Sindall Investments offers flexible financing and development expertise, covering a range of areas including urban regeneration, education, healthcare, housing and infrastructure.

The final subsidiary in the list is BakerHicks, which has been delivering design and engineering projects since 1957. It supports clients across the aviation, defence, life sciences and manufacturing, nuclear, power, public and rail sectors.

The AGM statement declared that the Group has had a strong start to the year and that all divisions have made further positive operational and strategic progress.

The committed order book as at 31st March 2019 had increased by 8% from the year end position to £3.8bn.

Based upon the performance to date and the current visibility of future workload, the group is on track to deliver a full year performance in line with its expectations and with more of a weighting towards the first half than in previous years.

The cash position remains strong. Average daily net cash since the start of the year to 30th April was £138m, an increase of £12m over the same period last year.

Construction & Infrastructure has continued its focus on contract selectivity and operational delivery and is anticipated to deliver the expected margin improvement in the year.

Fit Out has performed as expected against the predicted backdrop of a general tightening in overall market conditions.

Property Services is delivering its expected margin growth and is the most significant contributor to the growth of the Group order book.

Partnership Housing has performed as planned and is beginning to deliver the expected improvement in its operational delivery. The estimated average capital employed for the full year remains at circa £150m, with an increase in investment expected across the rest of the year as its developments progress.

The group has had a strong start to the year and the positive momentum coming into 2019 has continued. Its order book is showing good growth and the balance sheet and cash position are both in very good shape.

It is aligned to growth markets, there are signs of a strong profit potential in construction and there appears to be major scope for recovery in the partnership housing and urban regeneration projects.

Its strong financial discipline is reflected by the strength of the balance sheet, which underpins its investment in asset-intensive areas, it also adds an additional dimension to the quality of earnings argument.

The equity boasts a number of good names, including: Standard Life Aberdeen with 13.21%; J O Hambro Capital with 11.04%; Ameriprise Financial, 5.93%; J P Morgan Asset Management, 5.17%; John and Rosalind Morgan hold 10.08%; and John Lovell holds 3.96% of the equity.

The year to end December 2018 saw group revenue up 6.4% at £2.97bn whilst pre-tax profits were 24.2% better at £80.6m.

Estimates for the current year suggest £3bn of revenue and £82.5m pre-tax, worth 147p in earnings, almost 3 times covering a 54.75p dividend per share.

For the coming year brokers are going for £3.07bn of sales and £88.7m of profits, with 159.4p in earnings and 58.5p of dividend per share.

On less than eight times earnings and giving a very attractive yield of 4.7% this year, the share price of just £13 certainly does not reflect the quality and growth profile.

I see the shares reacting upwards in due course, with a Target Price of £16 a share within the next year or so.


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