Morgan Sindall Group Regulatory News (MGNS)

19 February 2015

MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'Group')

The Construction & Regeneration Group

RESULTS FOR THE FULL YEAR (FY) ENDED 31 DECEMBER 2014

Group highlights:

· Group result adversely impacted by a small number of construction contracts in Construction & Infrastructure, with Group adjusted operating profit down 14%

· Significant improvement in Urban Regeneration with operating profit of £10.0m (FY 2013: £1.0m) supporting the Group's long-term regeneration strategy

· Continuing strong momentum in Fit Out, with operating profit up 38% on revenue 19% higher. Positioned well for further growth with order book up 70%

· Construction & Infrastructure margin down to 0.3% (FY 2013: 1.0%), impacted by the performance of a small number of construction contracts primarily in London and the South

· Affordable Housing and Urban Regeneration well-placed to benefit from strong market positions in regeneration, with Group regeneration & development pipeline up 6%

· Higher quality Group order book, up 11% to £2.7bn

· Average net debt for the year of £9m and year-end cash of £56m. Significant investment in Urban Regeneration and the regeneration activities of Affordable Housing planned in 2015 to support profits in 2016 and beyond

· Total dividend of 27.0p per share, level with last year (FY 2013: 27.0p)

Commenting on today's results, Chief Executive, John Morgan said:

"Whilst there have been strong performances from Fit Out and Urban Regeneration, the overall Group result for the year is disappointing, having been adversely impacted by a small number of construction contracts in Construction & Infrastructure. The progress in Urban Regeneration is particularly pleasing as it supports our long-term regeneration strategy and provides a positive platform for further investment in regeneration, leveraging off our existing strong market positions.

Looking ahead to 2015, lower returns in Construction & Infrastructure are expected to remain for at least the first half of the year, as lower margin construction contracts tendered in 2012-2013 are worked through to completion. However, the continued positive momentum expected within Fit Out, Affordable Housing and Urban Regeneration, together with further investment programmes in regeneration opportunities, and supported by the improvement in the quality of our order book, provides confidence that the Group is well positioned to deliver overall growth in 2015 and beyond."

Presentation

1. There will be an analyst and investor presentation at Jefferies today at 09.00. Coffee and registration will be from 08.45

2. A copy of these results is available at www.morgansindall.com

3. A recording of today's presentation of these results to investors and analysts will be available at www.morgansindall.com

Note to Editors

Morgan Sindall Group

Morgan Sindall Group plc is a leading UK Construction & Regeneration group with a turnover of £2.2bn, employing around 5,700 employees and operating in the public, regulated and private sectors. It reports through five divisions of Construction & Infrastructure, Fit Out, Affordable Housing, Urban Regeneration and Investments.

Morgan Sindall Group's strategy is focused on two distinct but complementary business activities: Construction and Regeneration.

Construction activities comprise the following operations:

· Construction & Infrastructure: Focused on the commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport and water markets

· Fit Out: Focused mainly on the fit out of office space with opportunities in commercial, central and local government offices, further education and retail banking

· Construction and Services work within Affordable Housing: Focused on new build house contracting and planned and response maintenance

Regeneration activities comprise the following operations:

· Regeneration mixed-tenure developments within Affordable Housing: Focused on building and developing homes for open market sale and for social/affordable rent

· Urban Regeneration: Focused on transforming the urban landscape through partnership working and the development of multi-phase sites and mixed-use regeneration

· Investments: Focused on strategic partnerships to develop under-utilised property assets and provide the Group with construction and regeneration opportunities

In FY 2014, the term 'adjusted' excludes the impact of intangible amortisation of £2.4m (FY 2013: intangible amortisation of £2.7m, exceptional operating items of £14.7m and the deferred tax credit arising due to the change in the UK corporation tax of £2.5m).

Group revenue for the year was 6% up on the prior year at £2,220m, with all divisions delivering revenue growth with the exception of Construction & Infrastructure. Growth was driven by Fit Out (up 19%), Affordable Housing (up 11%) and Urban Regeneration (up 83%), whilst Construction & Infrastructure revenue was down 5%.

The Group's committed order book* as at 31 December 2014 was £2.7bn, an increase of 11% since the previous year end, driven by growth in the order books of Fit Out (up 70%), Affordable Housing (up 16%), Urban Regeneration (up 38%) and Construction & Infrastructure (up 3%). The regeneration & development pipeline** was £3.2bn, an increase on the previous year end of 6%.

Group profitability was adversely impacted by a small number of construction contracts in Construction & Infrastructure, which was announced in October and which offset strong performances from Fit Out and Urban Regeneration. This resulted in adjusted operating profit of £28.9m, down 14% on the prior year, with adjusted operating margin of 1.3% (FY 2013: 1.6%). Operating profit included a significantly lower profit from the sale of investments of £1.9m compared to the prior year (FY 2013: £9.9m).

Net finance expense increased to £3.7m (FY 2013: £2.3m), impacted primarily by higher amortisation of bank fees and non-utilisation charges, together with higher net interest on net debt and lower interest received from joint ventures.

The tax charge of £4.8m is a rate of 21% of profit before tax and is broadly in line with the UK statutory rate.

Adjusted earnings per share of 46.7p and fully diluted adjusted earnings per share of 46.0p were both down 23% on the prior year.

There was an operating cash inflow of £2.4m in the period, which resulted in a free cash outflow of £6.7m (FY 2013: inflow of £11.9m). A key component of this was an outflow of working capital of £11.8m, which included an increase in inventories of £41.2m, as the expected investment is made in the regeneration activities of Affordable Housing and in Urban Regeneration.

The average daily net debt for the period was £9m (FY 2013: £19m), of which £16m (FY 2013: £4m) was non-recourse debt. The Group had net cash of £56m as at 31 December 2014 (FY 2013: £70m), which included £17m of non-recourse debt (FY 2013: £8m).

During the year, the Group signed a new £140m committed revolving loan facility with four banks, which will mature in September 2018. Together with £30m of facilities signed in 2013 and which mature in 2016, this leaves the Group well financed to continue developing its strategy.

The total dividend for the year of 27.0p per share has been held level with the prior year (FY 2013: 27.0p).

Looking ahead to 2015, lower returns in Construction & Infrastructure are expected to remain for at least the first half of the year, as lower margin construction contracts tendered in 2012-2013 are worked through to completion. However, the continued positive momentum expected within Fit Out, Affordable Housing and Urban Regeneration, together with further investment programmes in regeneration opportunities, and supported by the improvement in the quality of our order book, provides confidence that the Group is well positioned to deliver overall growth in 2015 and beyond.

The following Business Review is given on an adjusted basis, unless otherwise stated.

Order book and regeneration & development pipeline

The Group's committed order book* at 31 December 2014 was £2.7bn, an increase of 11% from the previous year end. The divisional split is shown below.

* "Committed order book" comprises the secured order book and framework order book. The secured order book represents the Group's share of future revenue that will be derived from signed contracts or letters of intent. The framework order book represents the Group's expected share of revenue from the frameworks on which the Group has been appointed. This excludes prospects where confirmation has been received as preferred bidder only, with no formal contract or letter of intent in place.

In addition, the Group's regeneration & development pipeline** was £3.2bn, an increase of 6% from the previous year end.

** "Regeneration & development pipeline" represents the Group's share of the gross development value of secured schemes including the development value of open market housing schemes. 

The Construction & Infrastructure result for the year was down significantly on the prior year, being severely impacted by the performance of the Construction activities in the second half.

Divisional revenue of £1,172m was down 5% on the prior year (FY 2013: £1,234m), primarily driven by lower activity in Construction arising from on-going greater contract selectivity and a focus on the operational delivery of active projects. Split by type of activity, Construction accounted for 55% of divisional revenue at £639m, which was down 11% compared to the prior year, whilst Infrastructure was 45% of divisional revenue at £533m, up 3%.

Whilst the Infrastructure business performed reasonably well across the year, delivery pressures in London and the South's Construction activities during the second half resulted in an escalation of costs and increased forecast costs to complete, thereby adversely impacting profitability and margin. These delivery pressures related mainly to a small number of construction contracts which are all due to complete within the first half of 2015 and which all experienced programme slippage and increases in costs to complete as a result of inflation and additional un-forecast resource requirements. The full impact was mitigated in part by further overhead cost savings and provision movements including property dilapidation provisions no longer required.

Consequently, divisional operating margin reduced to 0.3% (FY 2013: 1.0%), giving an operating profit of £3.5m (FY 2013: £12.7m).

In order to address these operational issues and to support the platform for future profitable growth, management teams have been changed and strengthened at both local and divisional levels during the year. In enhancing the skills and experience in the division, this has reinforced the necessary systems and disciplines within bid selection, winning work and procurement to support future margin improvement.

The committed order book at the year end was £1,537m, up 3% since the start of the year. Importantly, the quality of the order book has improved significantly, with only 15% of the order book by value being won through competitive single stage procurement processes with the remaining 85% being derived through negotiated/framework/two-stage bidding procurement processes. At the same time last year, the proportion of work derived through negotiated/framework/two-stage bidding procurement processes was only 62% by value and this positive shift in the balance of orders by procurement type supports the opportunity for future margin improvement.

In terms of market sectors served, the largest market by revenue was Transport (Highways, Aviation and Rail) at 33% of divisional revenue, with Education remaining a significant market at 23% and Water contributing 11%.

Within Highways, significant work has been won through the Highways Agency's National Major Projects Framework. Awards have included the appointment, in joint venture and as one of four delivery partners, to a £184m contract to upgrade 17 miles of the M60 and M62 to a smart motorway and also in joint venture, a £35m barrier renewal works package between junctions 19 and 16 of the M1 to facilitate a future smart motorway scheme. Building on this success, the division has been appointed, in joint venture, by the Highways Agency to the largest ever framework for the improvement of England's motorways and major A roads. The four-year framework, with an option to extend by a further two years, is estimated to be worth up to £150m per annum to the joint venture. Within Aviation, the division has been selected as one of four partners at Heathrow Airport to deliver a £1.5bn programme of upgrades and improvements over the next five years following the completion of the rehabilitation of the northern and southern runways.

In Rail, operating centres in Manchester and Rugby, worth £19.7m and £17m respectively, have been handed over and a £113m position on the £250m Edinburgh-Glasgow Improvement Programme (EGIP) alliance has been awarded to the division by Network Rail. This two-year project will deliver a critical rail infrastructure upgrade and forms part of the £742m Scottish Government-funded investment to transform transport in the country. Work has also been secured through the Multi-Asset Framework Agreement including a £20m contract, in joint venture, to refurbish roof spans at Paddington Station.

In Water, the division continues to work within three frameworks, all of which have been extended into AMP6, the 2015 - 2020 asset management period.

Highlights within Energy have included new framework agreements and awards within existing long-term frameworks. Western Power Distribution has awarded the division a three-year framework agreement, with two one-year extension options, at an estimated annual value of over £30m to deliver the excavation, cable laying and reinstatement works within its West Midlands region. A five-year agreement, in joint venture, has been signed for electricity transmission overhead line work with Scottish Hydro Electric Transmission plc and a position on National Grid's National Onshore Underground Cabling framework has been secured. In the nuclear sector the division, along with The S. M. Stoller Corp. and Newport News Nuclear, both subsidiary companies of Huntington Ingalls Industries, has signed a long-term agreement to work together to offer a combined delivery capability to the UK nuclear market. Given the UK government investment in the nuclear industry, the collaboration enables the division to provide an enhanced range of new build and decommissioning services. At Sellafield, the division continues to provide a range of essential infrastructure asset services through its joint venture Infrastructure Strategic Alliance contract. Secured in 2012, the contract has a potential value of £1.1bn over a possible maximum duration of 15 years.

Within other parts of Infrastructure, the division has continued to target growth sectors with high barriers to entry. It is currently working on some of the UK's most complex civil infrastructure projects including providing its industry-leading expertise in Tunnelling in joint venture on Thames Water's £635m Lee Tunnel and on the C510 Whitechapel and Liverpool Street Station tunnels contract for Crossrail.

The value of the division's integrated Construction and Infrastructure capabilities was recognised in the award of, alongside two other contractors, a position on a major £300m eight-year redevelopment programme for BAE Systems which will transform its submarine building capabilities. The programme will include a mix of new-build projects and the refurbishment of existing facilities in what is the most significant redevelopment of the Barrow-in-Furness site since the 1980s.

Within Education, the division will play a significant role within the PF2 North West Priority Schools Building Programme batch following the appointment of the Investments division and Equitix Limited by the Education Funding Agency as the selected bidder to deliver five secondary and seven primary schools across the region. Also within Education, the London Borough of Newham has awarded the division a circa £14m contract to upgrade six primary schools.

Overall, the division's operating environment has improved over the year as the market recovery has gained traction despite the challenges presented by cost inflation driven by labour and material demands. Looking ahead to 2015, continued lower returns are expected through the first half at least as the construction contracts in London and the South are completed and other lower margin construction contracts procured during the more difficult pricing environment of 2012-2013 are worked through to delivery and completion. Thereafter, the division is expected to generate increasing margins and returns from the higher quality order book.

Fit Out has delivered a strong performance in the year, driven by improved market conditions and the division's ongoing focus on operational delivery. Revenue of £507m (FY 2013: £427m) was up 19%, with operating margin increasing to 3.0%, resulting in operating profit of £15.0m (FY 2013: £10.9m), up 38%.

The division has successfully balanced the significant upturn in activity and the consequent demands placed on the supply chain, with improved operational performance which has supported the margin improvement in the year. The second half of the year particularly has seen a significant increase in activity in line with the improving market conditions, with 62% of annual revenue being generated during that period. Additionally, the upturn in bidding activity and number of contract wins in the year has led to the committed order book at the year end being £241m, up a strong 70% from the prior year end and includes a higher level of contracts on less onerous terms and conditions.

The London region accounted for 67% of revenue (FY 2013: 74%), with other regions at 33% (FY 2013: 26%) all showing strong revenue and profit growth in the year. Split by type of work, 79% of revenue was traditional fit out work, compared to 21% 'design and build', whilst 74% of revenue related to fitting out of existing space (31% refurbishment 'in occupation'), compared to 26% which was new office fit out.

A number of notable appointments in the year have emphasised the division's expertise in the refurbishment of offices whilst in occupation. KPMG appointed the division to fit out 215,000 sq ft of office space in Canary Wharf, along with client and executive areas at its W1 premises, with a combined value of over £40m and the division won the Canadian High Commission's £30m renovation and refurbishment project of Canada House and an adjacent property.

Additionally, the division's Guardian News & Media project in London received a national accolade when presented with the British Council for Office's 2014 'Test of Time' award. The division successfully fitted out the 142,000 sq ft purpose-built Kings Place that provides a setting fit for the world's oldest independent newspaper whilst providing the technological and environmental requirements demanded by a global media brand.

Outside London, a high level of work has been secured through public sector construction frameworks, working alongside Construction & Infrastructure. These include major projects for Reading Borough Council through the iESE framework, for Bristol City Council through the Construction Framework South West and also for Luton Borough Council under the SMARTE East Framework. In Birmingham, fit out is underway on the VOX Conference Centre, an integral part of the new circa 590,000 sq ft Resorts World complex on the NEC campus.

Split by end market sector, key markets served are commercial offices (74% of revenue) and higher education (8% of revenue) together with retail banking, government and local authority work and work for charitable organisations.

The commercial office sector remains the division's core market, which has driven growth throughout the year through continuing positive market sentiment, the predicted spike in lease expiries combined with a shortage of premium Grade A office space, and ongoing pressure on central and local government to consolidate property portfolios.

Higher education has presented some positive opportunities for the division as competition amongst universities to attract students remains strong. In London, the division is working for eight leading universities, including a major contract for University College London and new wins for London School of Economics and Kingston University. Retail banking continues to offer opportunities as banks continue to consolidate and rationalise their estates.

Looking ahead, it is anticipated that Fit Out will build on the current positive momentum through 2015 and beyond and with its commitment to operational improvement and customer focus, the division is well placed to deliver further margin and profit growth.

Total divisional revenue of £423m was up 11% (FY 2013: £381m), whilst operating profit of £6.0m was down 30% on the prior year (FY 2013: £8.6m), impacted by an expected loss of £3.5m in the response maintenance activities.

Affordable Housing's activities are divided into two main categories: Regeneration (27% of revenue) which refers to the division's mixed-tenure regeneration housing schemes; and Construction & Services (73% of revenue) which includes new build housing contracting and planned and response maintenance services. Together, the division delivers a full range of housing solutions for its partners and customers.

In Regeneration, revenue was up 6% to £115m (FY 2013: £108m) with operating profit of £10.7m. 69% of revenue related to 475 (FY 2013: 530) open market sales completions at an average sales price of £167k, whilst 31% of revenue related to approximately 300 units through the social housing contracting element of the mixed-tenure schemes.

Capital employed in the Regeneration activities at the year end was £123m, up by 27% over the year. Of this, £75m is capital invested in returning active mixed-tenure schemes, £30m relates to historic shared equity loans and rental properties and £18m relates to land not currently being actively developed.

The 8% increase in its regeneration and development pipeline at the year end to £770m (FY 2013: £715m) has reinforced the market positon and profit potential of this area of the business. Confidence in the housing market, supported by the Government's Help to Buy initiative, has resulted in new opportunities in mixed-tenure projects developed in partnership with housing associations and local authorities and increased sales activity across all regions.

During the year, the division has capitalised on public sector land opportunities procured through the Greater London Authority (GLA) and the Homes and Communities Agency (HCA) Partner Panels. The division has positions on the four-year London Development Panel which is expected to procure up to £5bn of housing-led mixed-use developments on public land and on all four Regional Lots on the HCA's four-year Delivery Partner Panel 2 (DPP2) £4bn housing framework. New awards this year include the London Borough of Enfield's major £50m Ponders End Electric Quarter development, the appointment as preferred partner for the delivery of 600 homes working in partnership with the Borough Council of King's Lynn and West Norfolk and the commencement of the four-year £40m mixed-tenure homes scheme in Cockermouth, West Cumbria.

Positive momentum has also been maintained across all the division's existing landmark regeneration programmes, further underpinning the division's expertise in delivering complex, long-term schemes. In London, work has started on site on the London Borough of Barking and Dagenham six-year £83.8m Lymington Mews housing development and demolition is underway on the £270m Woolwich regeneration programme where 1,500 mixed-tenure homes are being created in partnership with Royal Borough of Greenwich and asra Housing Group. Both these schemes will require working capital investment through 2015, with the resultant profits being generated in 2016 and beyond.

Working as a partner in the Compendium Living joint venture with Riverside Housing, the circa ten year £108m Castleward Urban Village project is moving forward as the division progresses the first phase, creating 164 mixed-tenure homes and 12 commercial units.

Collaboration with other Group divisions has provided additional growth opportunities with the division delivering quality affordable housing within large-scale mixed-use regeneration programmes alongside Investments, Urban Regeneration and Construction & Infrastructure.

In Construction & Services, new-build housing contracting revenue of £139m (FY 2013: £92m) equates to approximately 1,150 completed units and has increased by 51% with the business maintaining its rigorous selection process although margins have been impacted by materials and skills shortages as well as inflationary pressures and continued competitive tendering. Scotland has proved to be one of the most successful regions with over £59m of contracts secured. Increased levels of local authority work have been won as councils are granted new powers to borrow to fund the construction of new council homes. At MOD Stafford, the division is on schedule to complete a £51m contract and hand over 346 new homes for Army families returning to the UK.

In planned maintenance, revenue of £108m (FY 2013: £113m) represented a 4% decline on last year. The market continues to provide a steady flow of work as local authorities and housing associations invest in improving housing stock. The division has capitalised on its proven track record in external environment improvements, further extending its specialist expertise in working on high-rise tower blocks through its appointments to deliver circa £11m of high-rise improvement programmes in Aberdeen and Glasgow. The division is currently working for Sandwell Metropolitan Borough Council on the refurbishment of high-rise buildings and the relationship has been further extended through the appointment to a framework that will undertake a £50m package of repairs and improvements to 6,000 council homes.

Response maintenance revenue of £61m (FY 2013: £68m) has declined by 10%, with an operating loss as expected of £3.5m (FY 2013: loss £1.2m). As part of the repositioning and turnaround of the business, a new and sector-experienced management team has been recruited during the year and investment made in business systems to improve operational efficiencies and enhance productivity and delivery. Additionally, the recent re-branding and re-launch of the business to 'Morgan Sindall Property Services' paves the way to offer a broader property service solution to a client base across the rest of the Group, with a plan to achieve a minimum of break-even by 2016.

A key challenge for response maintenance remains winning work on acceptable terms and progress has been made in this respect. During the year, a number of contracts have been won including the provision of facilities management services within a 28-year £32.8m North Tyneside Council Sheltered Housing PFI and a five-year £22m agreement with Estuary Housing Association to provide repairs services to its stock of over 3,900 homes.

Overall, the committed order book for Construction & Services at the year end was £673m (FY 2013: £581m), an increase of 16%. Of this, response maintenance accounted for £355m (FY 2013: £257m).

Looking ahead, Affordable Housing will continue with its strategy of growing its regeneration pipeline, increasing development across all its existing schemes and winning new opportunities to unlock land and deliver complex mixed-tenure schemes through local authority partnerships and collaborative working with Group divisions. Due to the timing of current developments and new opportunities, an increase in working capital is expected in 2015, with significant profit benefit anticipated in 2016 and beyond. Notwithstanding this, 2015 is expected to show margin and profit growth through a combination of its existing mixed-tenure schemes, a more positive contracting environment and an improved performance from response maintenance.

Urban Regeneration has delivered a strong performance, with a significant increase in operating profit to £10.0m (FY 2013: £1.0m) generated from its development portfolio as scheme phases reach completion. Working with landowners and public sector partners to unlock value from under-developed assets and bring about urban renewal, the division has also increased its regeneration and development pipeline by 13% to £2.2bn.

Capital employed1 at the year end was £49.4m. This is calculated after deducting non-recourse debt of £17m and deferred consideration on the purchase of interests in the ISIS Waterside Regeneration Joint Venture of £14m. Average capital employed1 was £49.9m, with the overall Return on Average Capital Employed2 of 17%.

Major contributors to the increase in profit include the completions of the sixth phase of the Smithfield Northern Quarter regeneration scheme in Manchester, KPMG's pre-let regional headquarters in Leeds and a multi-storey car park in Stockport.

Additionally, good progress has been made with developments through its two strategic joint ventures, the government-backed English Cities Fund (ECf) and ISIS Waterside Regeneration. The success of ECf, a partnership with the Homes and Communities Agency and Legal & General Property, has resulted in completions of the hotel and car park elements of the Salford Central regeneration scheme, plus completions at Canning Town and Plymouth. Through ISIS Waterside Regeneration, a partnership with the Canal & River Trust, profits have been generated from completions at Brentford and Islington Wharf, Manchester.

Across all its developments, improved residential sales totalling 347 units (FY 2013: 158) have underpinned the performance, with schemes prioritising their residential content to meet national demand. Good progress has also been made in the growing institutional private rented sector (PRS) with investors forward buying over 200 units within schemes located in Manchester, Bristol and Lewisham.

Four new development agreements valued at £300m have been secured during the year, including the Warrington Town Centre development and an agreement with Lambeth Council to deliver a £135m regeneration scheme in Brixton.

Within the currently active schemes, planning consents have been granted on 10 major projects with a total development value of £500m. Most notable was the full approval of the planning application for the £107m Marischal Square development, fully funded by Aviva Investors and set to transform a key location in Aberdeen city centre. Other projects which are currently being advanced are the first phase of the South Shields 365 regeneration project, Phase Three of the £180m Rathbone Market scheme in Canning Town through ECf, creating 216 homes, and Logic Leeds, where work has commenced on the division's 110-acre manufacturing and distribution development in the Leeds City Regional Enterprise Zone.

Major milestones include the commencement of construction on the first phase of the £200m Lewisham Gateway development in south east London. A total of £280m of ongoing construction activity is currently underway across 18 sites with other major site starts including the John Lewis at Home and Waitrose stores in Basingstoke, new office buildings in Chester and Salford and a new state-of-the-art Innovation Centre at the £100m Northshore regeneration scheme in Stockton-on-Tees. Additionally, the division continues to add value to partnerships and create valuable opportunities for sister divisions, providing work for Construction & Infrastructure and Affordable Housing on four major schemes. Affordable Housing is also a joint venture partner on two major regeneration schemes in Scotland and at Northshore in Stockton-upon-Tees.

Looking forward, Urban Regeneration is expected to continue to deliver strong profits as schemes within its forward development programme mature, providing a consistent annual double digit return on average capital employed2. With over 750 residential units scheduled for completion in 2015, the division is well placed to help meet the demand for quality homes in sustainable regeneration locations as it continues to bring forward residential elements and increase its footprint across regeneration areas. As a result, further working capital will be invested through 2015 and 2016 to support the division's ongoing developments and overall regeneration strategy.

1 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total liabilities (excluding corporation tax, deferred tax and inter-company financing). At year end, non-recourse debt was £17m (FY 2013: 8.1m) and deferred consideration was £13.6m (FY 2013: £17.8m). Average non-recourse debt was £16.2m (FY 2013: £3.9m) and average deferred consideration was £15.7m (FY 2013: £18.3m).

2 Return on average capital employed = (Adjusted operating profit less interest on non-recourse debt less unwind of discount on deferred consideration) divided by (average capital employed). Interest on non-recourse debt was £1.2m (FY 2013: £0.2m) and the unwind of discount on deferred consideration was £0.5m (FY 2013: £0.6m).

The strategic rationale for Investments is to unlock prime long-term construction and regeneration opportunities for other divisions and create value from investments for the Group. The division creates long-term strategic partnerships with public and private sector organisations to realise the potential of under-utilised assets, to promote sustained economic growth through regeneration and to drive cost efficiencies through innovative and integrated estate management solutions.

During the year, the division has disposed of its interests in the Hull Building Schools for the Future programme for £5.9m, resulting in a profit of £1.7m and its shares in PFF Lancashire Ltd for £0.3m, resulting in a profit of £0.2m. The divisional result also reflected the impact of a non-cash impairment charge of £1m, which is non-recurring by its nature, against the carrying value of one of its remaining investments.

In regeneration, the division has an acknowledged track record in Local Asset Backed Vehicle (LABVs) joint ventures and land swaps, providing commercial structuring, financing solutions and development expertise. Steady momentum has been maintained across its major programmes, the £1bn 15-year Slough Borough Council LABV and the £350m+ 20-year Bournemouth Town Centre LABV, with work procured from Construction & Infrastructure and Affordable Housing. In Bournemouth, two major projects have been handed over, with a private rental sector residential project scheduled to commence in 2016 and two further residential schemes to begin in 2015. In Slough, the £16m community development 'The Curve' is scheduled for completion in 2015 and detailed planning for 73 homes has been granted. The £38m Towcester mixed-use Regeneration and Civic Accommodation project is also underway in partnership with Construction & Infrastructure and Affordable Housing.

The division has developed significant PFI expertise within the education sector and has been appointed with Equitix Limited by the Education Funding Agency as its selected bidder for the PF2 North West, Priority School Building Programme batch. With a capital value of between £80m and £120m, the programme will provide five secondary and seven primary schools that will benefit from Construction & Infrastructure's experience in school design and construction.

The division has also secured increased workloads through the WellSpring Partnership, which it leads in Scotland and which is delivering £200m public sector healthcare and education projects for the Western Territory Hub Programme Board and the Scottish Futures Trust. £30m of schemes have been delivered this year through the Group's integrated capability, with design and construction services provided by Construction & Infrastructure.

Through its Community Solutions business, the division has continued to contribute revenue and profit through a growing number of management and service agreements across a portfolio of health and local authority buildings with an asset value of around £750m. With its services in increasing demand from NHS Trusts and local authorities seeking greater efficiencies, Investments anticipates future opportunities to work with new public sector partners.

In looking to widen the scope of business opportunities for Investments, the division is focusing on transferring knowledge and specialist expertise developed across its strategic alliances to new areas of its core sectors, healthcare and education. By positioning itself as development partner with private operators, the division is looking to capitalise on the increasing number of Foundation Trusts seeking to open private patient units, whilst also supporting health services, local authorities and care providers across the country as it delivers a rolling programme of supported living accommodation and services through its strategic joint venture HB Community Solutions.

Looking forward, delivering projects within its long-term regeneration programmes will remain the key strategic focus for 2015. At the same time, the division will maintain its drive to identify opportunities to work with new partners and clients, creating innovative capital-efficient partnerships and leveraging its expertise in project finance, development and asset management and the Group's integrated delivery capability.

1 Capital employed = total assets (excluding goodwill, intangibles, corporation tax credit and cash) less total liabilities.

Note: Directors' valuation of investments can only be made in circumstances where future cash flows are near certain. The Investments division holds a number of interests in developments, arrangements and schemes which are also included in "capital employed". Where directors' valuation is appropriate, current valuation is £3.0m relating to 2 (FY 2013: 4) investments with carrying value of £3.0m.

Net finance expense. Net finance expense was £3.7m, a £1.4m increase versus FY 2013 which is broken down as follows:

Tax. A tax charge of £4.8m is shown for the period (FY 2013: tax credit £1.1m). No tax liability is expected upon the gains on disposals of investments which occurred during the year. The remaining net income will attract tax at an effective tax rate approximating to the UK statutory rate.

Net working capital. 'Net Working Capital' is defined as 'Inventories plus Trade & Other Receivables, less Trade & Other Payables, adjusted to exclude deferred consideration payable, accrued interest receivable and capitalised arrangement fees.

Cash flow. Operating cash flow was an inflow of £2.4m, with a free cash outflow of £6.7m.

*includes shared equity redemptions, sale of investment properties, additional pension contributions and net provision movements (including property dilapidation provisions released to the income statement within Construction & Infrastructure)

Net cash. Net cash at the end of the period was £55.7m, a reduction of £14.0m from 1 January 2014.

Dividends. The Board of Directors has approved a final dividend of 15.0p per share (FY 2013: 15.0p), level with the prior year, resulting in a total dividend for the year of 27.0p per share (FY 2013: 27.0p).

Cautionary forward-looking statement

These results contain forward-looking statements based on current expectations and assumptions. Various known and unknown risks, uncertainties and other factors may cause actual results to differ from any future results or developments expressed or implied from the forward-looking statements. Each forward-looking statement speaks only as of the date of this document. The Group accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

Consolidated income statement

For the year ended 31 December 2014

There were no discontinued operations in either the current or comparative years.

Consolidated statement of comprehensive income

For the year ended 31 December 2014

Consolidated balance sheet

At 31 December 2014

Consolidated cash flow statement

For the year ended 31 December 2014

Consolidated statement of changes in equity

For the year ended 31 December 2014

Other reserves

Other reserves include:

· Capital redemption reserve of £0.6m (2013: £0.6m) which was created on the redemption of preference shares in 2003.

· Hedging reserve of (£0.8m) (2013: (£0.6m)) arising under cash flow hedge accounting. Movements on the effective portion of hedges are recognised through the hedging reserve, whilst any ineffectiveness is taken to the income statement. Cumulative movements recognised through the hedging reserve are recycled through the income statement on disposal of the associated joint ventures.

· Translation reserve of (£0.6m) (2013: (£0.4m)) arising on the translation of overseas operations into the Group's functional currency.

Retained earnings

Retained earnings include shares that are held as 'treasury shares' and represent the cost to Morgan Sindall Group plc of shares purchased in the market and held by the Morgan Sindall Employee Benefit Trust (the 'Trust') to satisfy options under the Group's share incentive schemes. The number of shares held by the Trust at 31 December 2014 was 545,767 (2013: 575,397) with a cost of £4.1m (2013: £4.3m).

Notes to the condensed consolidated financial statements

For the year ended 31 December 2014

1 General information

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2014 or 2013 but is derived from those accounts. A copy of the statutory accounts for 2013 was delivered to the Registrar of Companies and those for 2014 will be delivered following the Company's annual general meeting. The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

This preliminary announcement has been prepared solely to assist shareholders in assessing the strategies of the Board and in gauging their potential to succeed. It should not be relied on by any other party or for other purposes. Forward looking statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this preliminary announcement. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business factors, underlying any such forward looking information.

While the financial information included in this preliminary announcement was prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS.

In accordance with the Companies Act 2006, the Company will make the annual report and accounts for the year ended 31 December 2014 that comply with IFRS available on the Company's website on or about [19 March 2015]. If a shareholder has requested to continue to receive a hard copy of the annual report and accounts it will be posted on or about [18 March 2015]. A copy will be delivered to the Registrar of Companies following the Company's annual general meeting.

2 Basis of preparation

The Group's activities and the key risks facing its future development, performance and position are set out in this preliminary announcement and in its annual report and accounts for the year ended 31 December 2014.

3 Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

4 Accounting policies

There have been no significant changes to accounting policies, presentation or methods of preparation since the financial statements for the year ended 31 December 2013 and the year to 31 December 2014.

5 Business segments

For management purposes, the Group is organised into five operating divisions: Construction & Infrastructure, Fit Out, Affordable Housing, Urban Regeneration and Investments. The divisions' activities are as follows:

· Construction & Infrastructure: offers design, construction and infrastructure services, working on projects, and in frameworks and strategic alliances of all sizes. Markets include commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport and water. The division's professional services business offers multi-disciplinary engineering and design consultancy services.

· Fit Out: specialises in fit out and refurbishment projects. Overbury operates through multiple procurement routes in the commercial, central and local government office, further education and retail banking markets. Morgan Lovell specialises in workplace strategy and the interior design and build of offices.

· Affordable Housing: specialises in the delivery of complex regeneration schemes and in the design, build, refurbishment and maintenance of homes. Operates a full mixed-tenure model creating homes for rent, shared ownership and open-market sale. The division's response maintenance services include facilities management and planned and responsive repairs to social housing providers and public buildings.

· Urban Regeneration: works with landowners and public sector partners to unlock value from under-developed assets to bring about sustainable regeneration and urban renewal through the delivery of mixed-use and residential-led projects. Typically creates commercial, retail, residential, leisure and public realm facilities.

· Investments: creates long-term strategic partnerships to realise the potential of under-utilised assets, promotes sustained economic growth through regeneration and drives cost efficiencies through innovative and integrated estate management solutions. Markets include asset backed, education, healthcare and social care, residential, student accommodation, leisure and infrastructure.

Group Activities represents costs and income arising from corporate activities which cannot be meaningfully allocated to the operating segments. These include costs such as treasury management, corporate tax coordination, insurance management and company secretarial services. The divisions are the basis on which the Group reports its segmental information as presented below:

During the year ended 31 December 2014 and the year ended 31 December 2013, inter-segment sales were charged at prevailing market prices and significantly all of the Group's operations were carried out in the UK.

6 Income tax expense

Corporation tax is calculated at 21.50% (2013: 23.25%) of the estimated assessable profit for the year.

In 2014 a net tax charge of £4.8m has arisen, comprising a current tax charge of £4.3m and a deferred tax charge of £0.5m (2013: net tax credit £1.1m). The table below reconciles the tax charge for the year to tax at the UK statutory rate:

* Certain of the Group's joint ventures are partnerships for which profits are taxed within the Group rather than within the joint venture.

7 Dividends

The proposed final dividend of 15.0p is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. The final dividend will be payable to shareholders on 29 May 2015 to shareholders on the register on 1 May 2015. The ex-dividend date is 30 April 2015.

8 Earnings per share

The average market value of the Company's shares for the purpose of calculating the dilutive effect of share options and long-term incentive plan shares was based on quoted market prices for the year that the options were outstanding. The weighted average share price for the year was £7.70 (2013: £6.46).

A total of 268,056 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 31 December 2014 (2013: 698,089).

9 Net cash

During July 2014, the Group signed a new four year £140m committed revolving loan facility with four banks, which will expire in September 2018. Additionally the Group still retains £30m of committed facilities maturing in 2016. £15.0m of these facilities were drawn at 31 December 2014 (2013: £15.0m). Additional project finance borrowings of £16.9m (2013: £8.1m) were drawn from separate facilities to fund specific projects. These project finance borrowings are without recourse to the remainder of the Group's assets.

10 Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below. All were on an arm's length basis.

Trading transactions

During the year, Group companies entered into transactions to provide construction and property development services with related parties, all of which were joint ventures, not members of the Group. Transactions and amounts owed at the year end in relation to joint ventures are as follows:

All transactions with related parties were made on an arm's length basis.

Remuneration of key management personnel

The Group considers key management personnel to be the members of the Group Management Team, and sets out below in aggregate, remuneration for each of the categories specified in IAS 24 'Related Party Disclosures'.

Directors' transactions

There have been no related party transactions with any director in the year or in the subsequent period to 19 February 2015.

Directors' material interests in contracts with the Company

No director held any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 19 February 2015.

11 Contingent liabilities

Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating companies in the Group. There are contingent liabilities in respect of surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.

As at 31 December 2014, contract bonds in issue under uncommitted facilities covered £208.1m (2013: £185.3m) of contract commitments of the Group.

12 Subsequent events

There were no significant subsequent events.

Responsibility statement

The responsibility statement below has been prepared in connection with the Company's annual report and accounts for the year ended 31 December 2014. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

1. The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

2. The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

3. The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board on 19 February 2015 and is signed on its behalf by:

John Morgan Steve Crummett

Chief Executive Finance Director