Last checked at 26 Mar 2014 08:30
26 March 2014
Morgan Sindall Group plc ('the Company')
Annual Financial Report
Further to the release of the Company's Preliminary Results announcement on 18 February 2014, the Company announces that it has today posted the following documents on its website at www.corporate.morgansindall.com/investors:
· 2013 Annual report and accounts ('annual report')
· 2013 Sustainability Report
· Circular containing the notice of the 2014 annual general meeting
The Company will hold its annual general meeting at 12.00pm on Thursday 8 May 2014 at the offices of Jefferies Hoare Govett, Vintners Place, 68 Upper Thames Street, London EC4V 3BJ.
A copy of each of the documents listed has been submitted to the Financial Conduct Authority's national storage mechanism ('NSM') and can be accessed via the NSM website at www.hemscott.com/nsm.do.
The Company intends to adopt Financial Reporting Standard 101 Reduced Disclosure Framework for its Parent Company financial statements unless it receives objections from shareholders holding in aggregate 5% or more of the total allotted shares before 30 September 2014.
In accordance with the requirements of Rules 4.1 and 6.3.5 of the Disclosure and Transparency Rules, a description of the principal risks and uncertainties affecting the Group is set out in appendix 1 to this announcement. The Company's Preliminary Results announcement released on the 18 February 2014 contained all other information required by DTR 6.3.5.
ENQUIRIES:
Morgan Sindall Group plc Tel: 020 7307 9200
Mary Nettleship, Company Secretary
End
26 March 2014
Appendix 1
Principal risks and uncertainties
The risks and uncertainties described below represent those which the Board currently consider to be the most significant to delivering the Group's strategy. However, these do not comprise all of the risks associated with the Group and are not set out in any order of priority. There may be additional risks unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material. The relevant mitigating factors are also described below. Further information on the financial risks that the Group faces and how they are managed is provided on pages 106 to 108 of the annual report.
The Group's risk framework is designed and operated to identify, control and mitigate threats to the Group achieving its goals and is described below in principle:
· Each year the Group and its divisions undertake a comprehensive business planning process to identify objectives and set strategies to achieve their goals.
· The executive directors meet with the divisions each month throughout the year with an established agenda and reporting format covering a range of matters that must be brought to their attention. This allows the senior management team to ensure that it maintains oversight and control over the material aspects of strategic, financial and operational issues.
· The control environment is further underpinned by a clear set of delegated authorities that define processes and procedures for approving material decisions, particularly with regard to project pre-qualifications, tender pricing, bid submissions and capital requirements. This ensures that projects are approved at the appropriate level of management, with the largest and most complex projects being approved at Board level.
· Twice yearly each division carries out a detailed risk review which identifies mitigations or proposed actions for each significant risk. Risk registers document these together with any timescale by which actions are targeted for completion. In conjunction with the divisional risk reviews the Group executive team compiles its own assessment thus ensuring that a top down, bottom up approach is undertaken when considering the Group-wide environment.
· An annual internal audit plan, approved by the audit committee and covering both project and corporate level risks is developed based upon the key risks identified from the risk review process and feedback from current divisional performance. Following this the internal audit team reports regularly to the Board and the audit committee on the status of risk and control following its assignments.
· It is the role of the Group's audit committee to monitor and approve the work undertaken by the internal audit function and to ensure that the internal audit process remains efficient and effective. This monitoring process has been strengthened by divisional audit committees established separately for Construction & Infrastructure and Affordable Housing, which have larger and more complex operations than other divisions.
The Board has identified the following key risks to the Group achieving its strategic goals, aligned to the different elements of the Group's business model.
Risk category | Trend * | Description and impacts | Mitigation |
Markets The markets in which the Group operates are affected to varying degrees by general macro-economic conditions. The Group is particularly focused at present on managing the impact of the challenging economic conditions, changes in Government spending priorities, together with the availability of private sector funding.
| Ø | New opportunities Increased levels of new opportunities are available to the Group in a rising market, however it needs to remain focused upon selecting those which provide the Group with the ability to grow margins and repeatable business. Also there is still some uncertainty around the more optimistic but still fragile outlook including predicting future Government spending/funding priorities and the ability of the private sector to obtain sustainable levels of debt.
A significant fall in construction activity could impact revenues, profits and the ability to generate sufficient margins to cover overheads which could potentially result in a need to rescale the business and overheads.
It could also result in less cash being generated which would affect the Group's ability to invest cash in regeneration and growth markets. | · Market spread, geographical capability and diversification offer measured protection against decline in individual markets · Scale also gives increased resilience by enabling the Group to compete and work in areas with higher barriers to entry · Regular monitoring and reporting of financial performance, work won, prospects and pipeline of opportunities · Market intelligence helps to detect potential shifts in spending and inform adaptions to the Group's approach · Delegated authorities in place require approval from appropriate levels of management to bid for new work |
Ú | Overcapacity in market This leads to price competition and more onerous terms and conditions being sought by clients. This can also affect the bidding process where an increased number of pre-conditions may be put in place by clients through the bidding phase.
Increased price competition leads to downward pressure on margins and an increased risk profile if onerous terms and conditions are accepted. Ultimately overheads may not be covered by declining gross margins.
| · Delegated authorities in place require approval of tenders by appropriate levels of management, covering both price and terms and conditions · Delegated authorities stop the business knowingly taking on loss-making contracts · Through the development of effective client relationships, the Group seeks to differentiate itself through the quality of its service and consistency of delivery · Greater value can be offered to clients when, where appropriate, different divisions work together · Regular review of resource levels against anticipated workload
| |
Ú | Exposure to UK housing market The UK housing market is influenced by consumer confidence and in particular employment levels and availability of mortgage finance.
If unemployment were to increase or mortgage finance became more difficult to secure this could reduce the amount that people are willing to pay for houses reducing profitability from house sales and the value of assets such as land with residential planning permission and shared equity loan receivables. | · Monitoring of statistics such as the UK unemployment rate and mortgage lending figures ensure that management can react appropriately to the latest market conditions · When possible, forward purchased land is subject to economic viability tests meaning the price can be reduced or purchase cancelled should house prices fall sufficiently · If economically reasonable, large-scale residential schemes are forward sold to institutional or other investors
| |
*Trend - signifies the Board's opinion of pre-mitigation risk movement within the current business cycle
Risk category | Trend * | Description and impacts | Mitigation | |
Strategy The Group's strategy needs to be clearly articulated and understood to ensure successful outcomes are achieved. The Group's success is a product of both the strength of business management and its people.
| Ú | Conflicted decision making The Group's strategy is not clearly communicated to and understood by employees.
Employees may unintentionally make decisions that are not wholly aligned with the Group's strategic aims. | · Strategic aims of the Group, individual divisions and business units are communicated, as appropriate, in business cascades or in annual employee reviews that seek to align personal and corporate objectives · Delegated authorities ensure that material decisions are signed off at an appropriate level, ensuring that the decisions made are in accordance with the Group's strategy · Monthly divisional review meetings allow the Board to assess progress against the agreed strategy · Top down, bottom up annual business planning and budgeting process involving key personnel | |
People The Group's health, safety and environmental (HSE) performance and business conduct affects employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance.
In a rising economic environment, it can become increasingly difficult to retain key employees, especially those targeted by competitors.
| Ø | Environmental or safety incident An accident or incident causes harm to a community or to an individual, leading to the potential for legal proceedings, financial penalties, reputational damage and project delays.
Consequently the Group fails to pre-qualify for contracts due to a poor health, safety and environmental track record.
| · Key executives with specific responsibility for HSE are identified in each division and on the Board · HSE policy frameworks are communicated and senior managers appointed to manage them in each division and at project level where appropriate · Established safety systems, site visits, monitoring and reporting, including near miss and potential hazard reporting, are in place across the Group · Investigation and root cause analysis of accidents or incidents and near misses · Regular HSE training and updates including behavioural training · Major incident management plans and business continuity plans are in place and are periodically reviewed and tested
| |
Ù | Failing to attract talented people Risk that the Group fails to grow by not ensuring that the best people are employed to create the most capable teams possible.
The Group does not benefit from new ideas and experience and is unable to grow the business and achieve its long-term strategy.
| · Progression planning in place in each division to ensure immediate and future replacements are identified and developed accordingly · Investment made in graduate, trainee and apprenticeship schemes to secure an annual inflow of new talent · Monitoring of future skills and capability requirements · Identification of future talent · Director of people to develop and drive the talent agenda
| ||
Risk category | Trend * | Description and impacts | Mitigation |
People (continued) | Ù | Not developing or retaining capable teams In a rising market there is an increasing risk that the business will not be able to keep hold of employees or improve the performance of the teams that they work within.
Without capable teams, it becomes very difficult to maintain the high levels of customer service that the Group strives for. When employee turnover increases it can adversely affect morale within the rest of the team.
| · Annual employee appraisal process in place, providing two-way feedback on performance · Training and development plans seek to maximise relevant skills and experience · Remuneration packages are benchmarked where possible
|
Ø | Poor project delivery The quality of workmanship or poor commercial and operational delivery of a contract, whether by the Group or a joint venture partner, does not meet expectations of clients.
Interim cash payments may be withheld, impacting working capital, and issues may also impact contract profitability and corporate reputation. | · Strategic trading arrangements in place with key suppliers and subcontractors to help ensure consistent quality · Collation and review of client feedback · Lessons learned from exercises carried out on projects · Employees incentivised on basis of contract performance · Internal peer reviews · Regular monitoring of project performance including management of the work programme, margin, contract changes and cash
| |
Winning in our markets The Group undertakes several hundred contracts each year and it is important that contractual terms reflect risks arising from the nature and complexity of the works and the duration of the contract.
| Ø | Misprice contract When pricing a contract the planned works are not costed correctly, increased commodity prices are not factored in or risk is not properly evaluated, leading to a contract being mispriced.
Leads to loss of profitability on a contract and reduces overall gross margin.
| · System of delegated authorities governs tenders and the acceptance of work · A contract tender is reviewed at three key stages: pre-qualification, pre-tender and final tender submission · Contract tender approved by the appropriate level of management via tender review boards |
Ø | Managing changes to contracts and contract disputes As contracts progress there are inevitably changes to the works being delivered and a risk exists that the Group does not get properly reimbursed for the cost of the changes as a result of disagreement, poor commercial controls or disputes.
Leads to costs being incurred that are not recovered and loss of profitability on a contract. Ultimately the Group may need to resort to legal action to resolve disputes which can prove costly, and the outcomes can be uncertain.
| · Work carried out under standard terms wherever possible · Well established systems of measuring and reporting project progress and estimated out-turns, including any contract variations · Contract terms reviewed at tender stage and any variations approved by the appropriate level of management · Reviews in place to ensure rigour is applied in core processes to provide effective early warning · Decision to take legal action based on appropriate legal advice · Suitable provision made for legal costs
|
Risk category | Trend * | Description and impacts | Mitigation |
Winning in our markets (continued) | Ø | Poor contract selection Risk that the Group accepts a contract outside of its core competencies or for which it has insufficient resources. This can become a greater risk in a rising market when there are more opportunities, though these may vary in quality and there may be restricted availability of quality resources.
This may lead to poor understanding of project risks, poor project delivery and ultimately result in contract losses and reputational damage.
| · Business planning identifies markets and clients that the Group will target · System of delegated authorities governs tenders and the acceptance of work · Plans for specific types of work and contract size agreed by individual business · Staff resources planning · Initiatives to select supply chain partners to match the Group's expectations in terms of quality and sustainability
|
Maximise efficiency The Group has a unique and differentiating approach. If employees are not properly engaged with the culture of the business, clients are less likely to receive exceptional levels of service. | Ø | Perfect Delivery The Group does not fully adopt the philosophy of Perfect Delivery.
Project failures are likely to incur additional costs that erode profit margins. It is also likely that client experiences will fall short of the standards set by the Group, potentially leading to a reduction in repeat business or in referrals from client recommendations.
| · Continuing engagement with employees, clients and supply chain · Internal resources dedicated to the further development of Perfect Delivery, ensuring maximum engagement · Perfect Delivery culture is led from the top · Teams targeted and measured on achieving high levels of customer satisfaction |
Ø | Business conduct Failure by employees to observe the appropriate standards of integrity and conduct in dealing with clients, suppliers and other stakeholders. This is an increased risk in times of economic uncertainty and hardship.
Could expose the Group to significant potential liability and reputational damage that results in it failing to pre-qualify for contracts.
| · Independent Raising Concerns phone line available for all employees · Audit committee reviews incidents log from the Raising Concerns phone line which includes the outcome of investigations into such incidents and any follow up actions · Ethics policy communicated to all employees · Training in place to ensure awareness of and compliance with both competition law and the Bribery Act · Regular reviews undertaken to ensure procedures in place are adequate, followed and up to date | |
Risk category | Trend * | Description and impacts | Mitigation |
Disciplined use of capital In a rising market there is an increased risk that the terms on which the Group trades with counterparties affect its liquidity. Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern.
| Ù | Insolvency of key client, subcontractor or supplier Risk that insufficient credit checks and due diligence is not undertaken and that a key client, subcontractor or supplier becomes insolvent. There is also a risk that, given the wider macro-economic climate, historical credit checks are relied upon that have subsequently been overtaken by events.
Insolvency of a client may result in significant financial loss due to a bad debt. Insolvency of a subcontractor or supplier may disrupt a contract's programme of work and lead to increased costs in finding replacements for their services.
| · Work only carried out for financially sound clients, established through credit checks · Specific commercial terms, including payment terms, with escrow accounts used as appropriate · Seek and obtain financial security where required · Work with approved suppliers wherever possible · Contracts with clients, subcontractors or suppliers only entered into after review at the appropriate level of delegated authority · Regular meetings with key supply chain members to give and receive feedback and maintain the quality of the relationship |
Ú | Management of working capital Risk that poor management of working capital leads to inadequate liquidity and funding problems.
The lack of liquidity impacts the Group's ability to continue to trade or restricts its ability to invest in regeneration schemes or growth markets.
| · Daily monitoring of cash levels and regular forecasting of future cash balances · Regular stress testing of long-term cash forecasts · Regular assessment of the level of banking facilities available to the Group · Working capital monitored and managed as appropriate, with acute focus on any overdue work in progress, debtors or retentions · For very significant purchases on large projects, forward orders can be placed on a longer timescale · Group delegated authorities in place to ensure that prior approval is sought for any significant project-related capital requirements | |
Ø | Management of overheads The Group fails to responsibly shape the business and becomes uncompetitive.
If the cost base is too high, the Group may be hindered in winning new work and profit margins will be eroded. | · Overheads are reviewed on a monthly basis · Business planning identifies future overhead requirements · Internal and external benchmarking is carried out to ensure overhead levels are appropriate | |
Pursue Innovation The Group is committed to offering clients innovative and cost effective solutions. If it fails to encourage an innovative approach across the Group it will become less effective. | Ù | Innovation Failure to adopt appropriate innovations in new products or techniques.
The Group becomes less effective than its competitors and not able to secure best value for, or offer the best solutions to, its clients. New technologies and innovations are not promoted within the business environment, reducing the attraction of the Group to new and existing talent.
| · Reviews undertaken to promote elimination of waste of both resources and process, adopting lean methodology where appropriate · Building Information Modelling strategy developed to provide more efficient asset management across the whole life cycle · Maintaining knowledge base of new products and thinking · Innovation on the IT agenda encouraging the promotion of new ideas into the business |