Morgan Sindall boss insists problem jobs are 'historic'

Morgan Sindall’s boss has insisted that a number of problem projects that saw the firm take a £13m hit to its profit over the first half of the year are historic and will have no ongoing impact.

Speaking to Building after Morgan Sindall published its half-year results this morning, chief executive John Morgan said the small number of problem contracts, which led to the firm making a £13m provision in its accounts, were “very old contracts that are nothing to do with current trading”.

“That is the critical thing for me. The jobs are done and dusted and historic,” he said.

Morgan declined to say how many jobs were involved, or comment further on the nature of the contracts.

‘It’s been pretty competitive out there’

Reporting its results for the six months to 30 June 2013, Morgan Sindall posted pre-tax profit of £1m, down from £18.8m for the same period the previous year, after making the £13m provision.

The firm said it had received legal advice on the contracts and believed that the amounts were recoverable, but due to the protracted nature of pursuing legal action it had made provision for the shortfall in its accounts.

Overall, revenue across the group rose 2% to £1,019m, with operating profit, before the deduction of the £13m in exceptional items, of £16.2m, down 22% on £20.8m the previous year.

The firm’s construction and infrastructure business reported revenue of £593m for the period, up slightly on £583m for the same period last year, with operating profit of £6.4m - before the exceptional items - down 25% from £8.5m.

The construction division’s operating margin fell from 1.5% to 1.1%.

‘We’re now focusing on growth’

Morgan said the firm could see signs of the market recovering, but it would take time for this to flow through into improved margins. He said he expected margins over the full-year “not to get any worse”.

“Margins have been tight - it’s been pretty competitive out there. We’re seeing a little bit of light at the end of the tunnel, there’s a little more work around, it will probably take a little time for that to come through into the margins because obviously it does take time for work to be completed and slightly better margins to come through,” he said.

After the firm restructured last year, which cost the business £10m in one-off costs but led to up to £15m in annualised savings, Morgan said the business was now focused on positioning itself to take advantage of the upturn in the market.

He said: “We took a lot of cost out … and that is not where we are now, it’s a matter of looking more toward the growth agenda than the cost cutting agenda.

“I’m not saying we’re not taking out any more cost but overall we will probably end up at the end of the year employing more people than when we started.”

He said the firm would continue to focus on selective bidding and “winning bigger more complicated jobs, often working with other companies”.

Education miss a ‘disappointment’

Last month Morgan Sindall missed out on the Education Funding Agency’s shortlist for its new £4bn contractors’ framework, meaning the firm will not be able to bid for capital-funded schools work coming through the government’s flagship school building programme. However, the firm will still be able to bid for privately-financed schools work

Morgan said that missing out on framework shortlist was “disappointing”. Currently around a quarter of the firm’s construction revenue is in education, and Morgan admitted that this was now likely to fall, particularly as the government’s private finance schools programme was so small, but he said the firm would seek to compensate by increasing its work in other areas, as well as winning work in the higher education market.

“We expect education to remain strong, but I suspect it will fall as a percentage as our work increases in other areas relative to education.

“It was disappointing [to miss out on the EFA framework], but luckily we have lots of other work we are pricing.

“The PFI [schools programme] isn’t going to be huge. We have to be realistic. [But] the universities [market] is very big and that’s where we’re very strong.

“A lot of the areas that we are moving into will compensate the education.”

Affordable housing still gloomy

The affordable housing business posted a fall in revenue of 8%, down from £202m last year to £185m, with operating profit down 64% from £7.5m to £2.7m. The operating margin in the affordable housing business fell sharply from 3.7% to 1.5%.

Morgan said he would like for the affordable housing business “to do better”, but stressed the firm was now focusing on more complicated mixed-tenure scheme to boost returns.

However, he said this did not mean that it would pull out new build affordable housing contracting. “We will continue to do it and the market will rise and it will fall. It’s just not a brilliant market at the moment.

“We’re not looking to come out of it and of course we do a lot of new build and use the same skills in the mixed tenure work.”

“As a percentage [new build] it will fall but it remain important to us.”

Regeneration business a bright note

He said he was particularly pleased at the performance of the regeneration business, which was working increasingly closely with the affordable housing arm.

In the results the firm’s regeneration business posted revenue of £34m, up 48% from £23m the previous year, with operating profit of £400k, down from £1.5m the previous year, with a regeneration pipeline of £2.2bn.

Morgan said: “That’s what distinguishes us from other contractors - our regeneration pipeline that we’ve been working very hard at for the last five years.

“And more of these schemes are now coming onto site - and very often on those schemes we will be working in conjunction with [affordable housing arm] Lovell, who will deliver the affordable housing. So that’s an exciting prospect for us.”

Meanwhile, the firm’s fit-out business posted revenue of £203m, up from £191m, with an adjusted operating profit of £5m, down 9% from £5.5m the previous year. The operating margin tightened from 2.9% to 2.5%.

Morgan said he expected to see an improvement in the fit-out business. “I’d be disappointed if [the fit-out business] didn’t do just a little bit better than it is going forward. Enquiries are fairly positive, but it’s not going to rush away with itself. It’s not going to do worse and should do slightly better.

Morgan said the overall construction market was “a little bit better than it was six months ago”.

“But let’s not get to carried away - there’s no doubt that in London and the South-east the market is not too bad , indeed we’re finding Scotland good, but it’s going to take time for it to come through in margins,” he said.

“Margins are still very tight, but there is a little more work around.”