Firm expects big boost from its regeneration arm as tightening margins and 拢15m writedown drag down profit

The Curve, Slough

Morgan Sindall has insisted it is on track to return to growth and greater profitability, after tightening margins and a 拢15m writedown due to problem jobs more than halved its profit last year.

In its results for the year to 31 December 2013, published this week, Morgan Sindall鈥檚 group profit fell dramatically, with pre-tax profit down 59% to 拢13.9m, and operating profit down 54% to 拢16.2m.

The fall in profit was due to tightening margins across the group and a 拢14.7m provision made for costs related to four problem jobs, which sent the firm鈥檚 construction business into the red (see box below).

But even stripping out the 拢14.7m in exceptional items along with 拢5.2m in other finance costs, the group鈥檚 profit still took a sharp dip, with adjusted pre-tax profit down 34% to 拢31.3m.

However, revenue across the group remained stable, up 2% on last year to 拢2.1bn.

Speaking to 黑洞社区, Morgan Sindall chief executive John Morgan said 2013 had been a 鈥渄ifficult year鈥, with competitive pressures impacting on margins.

In the construction business, the operating margin, adjusted to take into account the 拢14.7m provision, contracted from 1.7% last year to 1%, with its adjusted operating profit down 36% to 拢12.7m. The margin also contracted in the affordable housing business, down from 3% last year to 2.3%, with operating profit down 25% to 拢8.6m.

Only in the fit-out business did the margin hold up, remaining stable at 2.6% (see box).

Morgan said he expected improvement in the firm鈥檚 margins this year, though cautioned that cost inflation would impact on profitability going forward.

He said: 鈥淭here are signs of life in the construction market, including outside of London, but the supply chain is putting its prices up.

鈥淲e would hope for an improvement, rather than a huge jump in margins.

鈥淭ender prices are rising significantly, so that is the light at the end of the tunnel - and that is enough to offset the rise in prices on the current jobs - but the difficulty is on the jobs you won a year or so ago if they鈥檙e not completely subcontracted out.鈥

However, Morgan said the firm was on track to 鈥渞eap the rewards鈥 for its 鈥渉ard work鈥 during the economic downturn, with a boost expected from its regeneration business, where Morgan Sindall has a development pipeline of large-scale projects worth 拢3bn, including a 拢1bn regeneration project in Slough, called The Curve (pictured).

He said: 鈥淚n the last five years we鈥檝e spent a lot of money on regeneration, which would鈥檝e depressed our profits, but we now have something really serious going forward.鈥

The regeneration business posted an operating loss of 拢1m last year, but Steve Crummett, Morgan Sindall finance director, said the firm now expected significantly increased profit from the business as the long-term regeneration schemes began to be built out.

鈥淵ou can see a clear path over the next five years in the regeneration business. We鈥檙e on the cusp of reaping the benefits of all the good work that has gone in over the last five years.鈥

 


Morgan Sindall 2013 results

Group
Revenue: 拢2.1bn (+2%)
Pre-tax profit: 拢13.9m (-59%)
Order book: 拢2.4bn (+8%)

Construction and infrastructure
Revenue: 拢1.2bn (+6%)
Operating profit: -拢2m
Adjusted operating profit*: 拢12.7m
Margin: 1% (2012: 1.7%)
* after 拢14.7m in exceptional items

Fit-out
Revenue: 拢427m (-2%)
Operating profit: 拢10.9m (-4%)
Margin: 2.6% (2012: 2.6%)

Affordable housing
Revenue: 拢381m (-1%)
Operating profit: 拢8.6m (-25%)
Margin: 2.3% (2012: 3%)

 


Problem jobs are 鈥榲ery old鈥

The problem jobs that forced Morgan Sindall to write off nearly 拢15m in its latest results are linked to the firm鈥檚 acquisition of Amec鈥檚 construction business, 黑洞社区 understands.

In its full-year results published this week Morgan Sindall said it had made a 拢14.7m provision for costs related to four problem contracts, which saw the firm鈥檚 construction business post a 拢2m operating loss for the year.

Morgan Sindall said the jobs were 鈥渉istoric鈥 with issues relating to two of the jobs now resolved, but the remaining two were still outstanding.

Speaking to 黑洞社区 this week, Morgan Sindall chief executive John Morgan said the jobs were 鈥渧ery old鈥 but declined to comment further.

However, it is understood that the jobs are contracts inherited by Morgan Sindall when it made the acquisition of Amec鈥檚 construction business in 2007.

Morgan Sindall bought Amec鈥檚 construction business and development arm for 拢26m in 2007.

In its 2008 accounts Morgan Sindall wrote down the value of the acquisition by 拢60.5m to account for liabilities attached to the Amec construction business.

This week, Morgan said he had no regrets about the Amec acquisition, saying it had doubled the size of the Morgan Sindall business and made the firm a real player in the regeneration sector, which is now a key part of Morgan Sindall鈥檚 strategy.

He said: 鈥淲e didn鈥檛 have to go to the market for any more money, so it didn鈥檛 dilute existing shareholders interests. It鈥檚 not been completely plain sailing but no acquisition is, and we鈥檙e now in a different space.鈥