Morgan Sindall puts faith in regeneration

Morgan Sindall has insisted it is on track to return to growth and greater profitability, after tightening margins and a £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’s group profit fell dramatically, with pre-tax profit down 59% to £13.9m, and operating profit down 54% to £16.2m.

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

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

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

Speaking to Building, Morgan Sindall chief executive John Morgan said 2013 had been a “difficult year”, with competitive pressures impacting on margins.

In the construction business, the operating margin, adjusted to take into account the £14.7m provision, contracted from 1.7% last year to 1%, with its adjusted operating profit down 36% to £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 £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’s margins this year, though cautioned that cost inflation would impact on profitability going forward.

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

“We would hope for an improvement, rather than a huge jump in margins.

“Tender 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’re not completely subcontracted out.”

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

He said: “In the last five years we’ve spent a lot of money on regeneration, which would’ve depressed our profits, but we now have something really serious going forward.”

The regeneration business posted an operating loss of £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.

“You can see a clear path over the next five years in the regeneration business. We’re on the cusp of reaping the benefits of all the good work that has gone in over the last five years.”