Morgan Sindall Group Regulatory News (MGNS)

18 February 2014

MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'Group')

The Construction & Regeneration Group

RESULTS FOR THE FULL YEAR (FY) ENDED 31 DECEMBER 2013

1Adjusted is defined as before intangible amortisation (£2.7m), exceptional operating items (£14.7m) and (in the case of earnings per share) deferred tax credit £2.5m (FY 2012: intangible amortisation (£2.9m), exceptional operating items (£10.0m) and deferred tax credit £1.5m)

Group highlights:

· Continued tough market conditions throughout the year:

o Some signs of increased activity and market confidence through the second half

o Order book up 8%. Regeneration & development pipeline up 23%

· Margins remain under pressure, mainly in Construction & Infrastructure and Affordable Housing, due to highcompetition and increased input costs

· Strategic focus on:

o Maximising returns from existing schemes - regeneration developments and construction frameworks

o Differentiation through complex construction and development schemes, requiring an integrated Groupapproach

· Strong cash management with average debt levels showing improvement on 2012. Net cash of £70m at year end

· £1.7m increase in exceptional charge to £14.7m (in relation to four old construction contracts announced at the half year) due to commercial settlement of one contract in the second half 

· Total dividend of 27.0p per share, level with prior year

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

"2013 has seen challenging conditions predominate across most of our markets, with competitive pressures impacting on margins and profitability. Notwithstanding this, the positive operating cash flow generated by the business has allowed us to make further investment in strategic assets, key skills and resources, which positions the Group well to benefit from future growth opportunities.

Looking ahead to 2014, although there are signs of improving conditions in some of our markets, it is anticipated that upward pressure on supply chain costs and skills availability will provide additional management challenges. Against this backdrop, we remain confident that our robust order book and on-going disciplined approach to contract selectivity will support the delivery of growth in this year and beyond."

Presentation

1. There will be an analyst and investor presentation at Numis Securities Ltd's offices, The London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT at 09.30 GMT. Coffee and registration will be from 09.00

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

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

Note to Editors

Morgan Sindall Group

Morgan Sindall Group plc is a leading UK Construction & Regeneration group with a turnover of £2.1 billion, employing around 5,700 employees and operating in the public and commercial sectors. It operates through five divisions of Construction & Infrastructure, Fit Out, Affordable Housing, Urban Regeneration and Investments.

The term 'adjusted' excludes the impact of intangible amortisation, exceptional operating items and the deferred tax credit arising due to the change in the UK corporation tax rate. Exceptional operating items are items of financial performance which the Group believes should be separately identified on the face of the income statement to assist in the understanding of the financial performance of the Group.

In FY 2013, intangible amortisation was £2.7m (FY 2012: £2.9m), exceptional operating items were £14.7m (FY 2012: £10.0m) and the deferred tax credit was £2.5m (FY 2012: £1.5m).

Financial

Revenue for the period was 2% up on the prior year at £2,095m. The Group's committed order book* as at 31 December 2013 was £2.4bn, an increase of 8% since the previous year end, whilst the regeneration & development pipeline** stood at £3.0bn, up on the previous year end by 23%.

The adjusted gross margin reduced 90bps to 8.2% (FY 2012: 9.1%), impacted by competitive market pressures mainly across the Construction & Infrastructure and Affordable Housing divisions.

Adjusted operating profit of £33.6m was 30% down on the prior year, with adjusted operating margin of 1.6% (FY 2012: 2.3%). This included profit from the sale of investments totalling £9.9m (FY 2012: £8.8m).

The net finance expense increased to £2.3m (FY 2012: £1.0m), impacted by lower interest received from joint ventures, higher bank fees and an unwinding of the discount on deferred consideration, which together more than offset the benefit of a lower net interest charge on lower average net debt.

The tax rate, excluding the deferred tax credit, reduced to 11% (FY 2012: 18%), primarily as the profit on the sale of investments is treated as non-taxable.

The adjusted earnings per share of 60.9p and fully diluted adjusted earnings per share of 60.0p were both down 34% on the prior year.

Exceptional operating items of £14.7m have been charged in the year representing an impairment to trade and other receivables in relation to four old construction contracts held on the balance sheet.

At the half year, an impairment of £13.0m was made in respect of these items, which was based on an assessment of progress made at that time towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery. During the second half, there has been commercial resolution achieved on one of these contracts, whilst another has been impaired to reduce the carrying value to nil. In relation to the remaining two contracts, the Board believes it is appropriate to provide against these balances to an amount it considers is a balanced estimate of overall likely resolution based upon its current assessment of progress made towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery.

The result is that after charging exceptional operating items, the reported profit before tax for the year was £13.9m (FY 2012: £34.2m). Basic earnings per share was 35.4p (FY 2012: 72.5p).

The on-going focus on cash and working capital management has continued to deliver positive progress. Operating cash flow of £14.9m was generated, compared to an operating cash outflow of £42.7m in the prior year. A key component of this is working capital, where a working capital outflow of £8.4m in the year compared to an outflow of £76.9m in 2012.

The average daily net debt for the year was £19m, an improvement on last year (FY 2012: net debt £40m). The average daily net debt for the second half of 2013 was £6m (H2 2012: net debt £45m). The Group had net cash of £70m as at 31 December 2013 (FY 2012: £50m).

During the period, the Group has increased its committed banking facilities to provide additional headroom as well as providing available facilities to take advantage of investment opportunities as they arise. Total committed facilities are now £140m, of which £110m expire in September 2015, £15m in May 2016 and £15m in September 2016.

The final dividend of 15.0p per share has been held level with the prior year (FY 2012: 15.0p), resulting in a total dividend for the year of 27.0p (FY 2012: 27.0p).

Strategy

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

Construction activities currently represent 92% of Group revenue, generated from the following divisions:

· Construction & Infrastructure (59% of revenue): Focused on the commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport and water markets

· Fit Out (20% of revenue): Focused on London and Commercial office space with opportunities in commercial, central and local government offices, higher education and retail banking

· Construction and services work within Affordable Housing (13% of revenue): Focused on new build contracting and planned and response maintenance

Regeneration activities include the Urban Regeneration and Investments divisions and mixed tenure development within Affordable Housing. Regeneration is currently 8% of Group revenue with an order book of £3.0bn, up 23% on the previous year.

The positive operating cash generation from Construction allows investment in longer term Regeneration projects to deliver long term sustainable returns.

The Group continues to adapt to challenging market conditions by increasing collaboration and integration between the divisions enhancing its differentiation. Skills and experience from across the Group are being brought together to deliver complex projects with more attractive returns.

Looking ahead to 2014, although there are signs of improving conditions in some of our markets, it is anticipated that upward pressure on supply chain costs and skills availability will provide additional management challenges. Against this backdrop, we remain confident that our robust order book and on-going disciplined approach to contract selectivity will support the delivery of growth in this year 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 2013 was £2.4bn, an increase of 8% 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.

The Group's regeneration & development pipeline** was £3.0bn, an increase of 23% 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 division has experienced challenging market conditions through the year, which has significantly impacted on overall profitability. Although divisional revenue of £1,234m was up 6% on the prior year (FY 2012: £1,168m), operating margin reduced to 1.0% impacted by competitive pressures and more latterly by cost inflation, whichresulted in operating profit of £12.7m (FY 2012: £19.7m). The committed order book of £1,499m has decreased by 1% since the end of 2012 and of this total, 54% is committed in 2014.

In terms of markets served, the largest market sector for the division is Transport (Highways, Aviation, Rail), which accounted for 28% of divisional revenue. Other significant markets served are Education (26%) and Water (14%). By type of activity, Construction accounted for 56% of divisional revenue (FY 2012: 57%) and Infrastructure accounted for 44% (FY 2012: 43%).

Within Infrastructure, the division has made strong progress in Transport, where continuing Government investment has helped the division increase its profile in the highways sector. This has included significant activity on Highways Agency smart motorway schemes, such as the award, in joint venture, of the M1 upgrade between junctions 39 and 42. The Aviation sector particularly values the benefits of the division's integrated design and build offering, with work being undertaken on a range of projects covering terminals, air traffic control centres, runways, hangars and airport infrastructure. The division has furthered its expertise in safe and consistent delivery in these challenging environments with the completion of the rehabilitation of Heathrow Airport's southern runway - activity on the northern runway is scheduled for 2014. At Stansted Airport, the division has secured a new framework agreement for the provision of design, engineering, planning and architectural services. The division has positioned itself for further growth in Rail by combining its rail electrification capabilities with its main rail offering and is now addressing the market with a more comprehensive range of services through a simplified structure. In January 2014, the division was awarded an alliancing contract by Network Rail in relation to the £650m Edinburgh-Glasgow Improvement Programme (EGIP). The division has already successfully delivered the new £25m station at Haymarket in Edinburgh through EGIP.

The Energy sector remains attractive as the division delivers efficient energy solutions in generation, transmission and distribution through strategic alliances and frameworks. The division continues to deliver projects on National Grid's Electricity Alliance Central (EAC) framework which provides major enhancements to the UK's electrical transmission infrastructure as part of a five year agreement which runs until March 2017. The Alliance has recently been awarded a £10m scheme at Middleton Substation, near Heysham, Lancashire and work will start on site in March 2014. The Alliance also continues to deliver the £110m project at Connah's Quay which involves the construction of a new 400kV Gas Insulated Switchgear (GIS) substation. Both of these projects play a vital role in the reinforcement of the high voltage transmission infrastructure in north-west England. In the nuclear sector, work has commenced at Sellafield following last year's appointment as delivery partner in joint venture on the potential 15-year £1.1bn contract, and further levels of activity will be undertaken in 2014.

During 2013, the division continued to help maintain and improve the UK's Water networks through positions on three frameworks. It remains committed to growing its presence further in this market; as the water industry starts procurement for its next asset management period (AMP), Severn Trent Water and Yorkshire Water have already confirmed the division's position on their AMP6 frameworks.

In addition, its specialist tunnelling capability on large-scale civil engineering schemes was demonstrated by further progress on Crossrail projects and Thames Water's Lee Tunnel. Further investment will be made in 2014 to secure, in joint venture, a contract within the Thames Tideway Tunnel project, following pre-qualification success.

The Construction business has worked on projects alongside all other Group divisions, demonstrating how the Group's integrated approach can help reduce complexity for clients and overcome barriers to success. It has continued to increase its foothold in the Commercial sector, not least in London where it was appointed by The Crown Estate in June to refurbish 1-3 Regent Street, a Grade II listed building in St. James's. It is well positioned as the sector's recovery gains traction. In Education, £264m awards were secured across the country during the year.

Importantly, the division has secured a place on the Defence Infrastructure Organisation design and build framework covering the East Midlands and Eastern England. The framework, estimated to be worth between £100m and £250m over an initial four year period, and potentially for a further three years, is the first of seven Capital Works Frameworks procured under the Next Generation Estates Contracts programme for the delivery of construction projects on the Defence Estate.

Exceptional operating items of £14.7m have been charged in the year representing impairments to trade and other receivables in relation to four old construction contracts held on the balance sheet. During the second half, there has been commercial resolution achieved on one of these contracts, whilst another has been impaired to reduce the carrying value to nil.

Looking ahead, the division is focused on building its integrated offering to its key strategic sectors, with a view to securing more complex and long-term projects that offer enhanced returns through strategic alliances, frameworks and working collaboratively across the Group. At the same time, on-going investment in developing the division's skill base and supply chain will further enhance its ability to deliver the highest operational standards to its customers.

Although increasing market confidence in future construction output has become apparent in the latter part of the year, as evidenced by increased activity and bidding levels, this has been accompanied by upward pressure on supply chain costs and availability, which will impact on full margin recovery. Against this backdrop, continued stringent bid selection and rigorous management of working capital will underpin performance and will further position the division to benefit from future growth opportunities as they arise.

Market conditions for Fit Out have remained broadly stable throughout the year, with strong competition resulting in a price sensitive market. In the final quarter of the year though, early indications of growing confidence in market improvement were noted in London and across the regions.

Although revenue was down 2% on the prior year, the operating margin was held level at 2.6% (FY 2012: 2.6%) resulting in an operating profit of £10.9m (FY 2012: £11.3m). The committed order book of £142m was down 16% compared to the prior year end, however the current level of expected orders and high quality prospects in the bid pipeline suggest an increasing level of overall sales activity going into 2014.

The London market, which accounts for 74% of revenue, has experienced improving occupier confidence with customers in professional services and the technology, media and telecoms sectors all driving demand. Activity has been weighted towards refurbishment of offices whilst in occupation and the division's flagship project, the fit out of PwC's 450,000 sq ft headquarters at Embankment Place, London has been successfully delivered. This ambitious and highly technical refurbishment programme set out to revitalise dated and inefficient workspaces and was carried out with around 2,000 staff in occupation. The complex refurbishment of the building achieved an 'outstanding' BREEAM score (Building Research Establishment Environmental Assessment Method) and the building now boasts some of the highest sustainability credentials in Europe. 

In other regions (26% of revenue), high profile completions include ITV's new high specification facilities at MediaCityUK in Salford whilst the integrated services of the Fit Out and Construction & Infrastructure divisions delivered a highly technical and strategic project for National Grid.

Beside the commercial office market sector which accounts for 88% of revenue, higher education (8% of revenue) and retail banking (1% of revenue) remain other strategic growth sectors. As major universities embark on significant capital spend programmes, the division has increased its sector presence with noteworthy wins from five of London's leading universities and three major regional universities. Within retail banking, market opportunities are expected to increase as banks undergo consolidation and estate rationalisation.

The period has also seen the successful launch of the division's Workplace Consultancy service, undertaking work within its first year of operation for prominent clients including Nuffield Health and SAS. Other highlights include the division winning its first fit out project through referral from one of its international alliances.

Looking ahead, it is anticipated that the market will show a measured recovery in 2014, with renewed confidence leading to an increase in profitable opportunities across all core sectors. The division is well placed to capitalise on the increasing number of larger corporates securing office space for 2015-16 occupation and the expected significant surge in lease expiries expected in London over the next four years. As occupiers seek new premises in a supply-constrained market, it is anticipated that this demand will lead to an improved profitable pipeline from which the division is well-positioned to benefit.

Strategically, the Affordable Housing divisional activities can be categorised into (i) Regeneration (mixed-tenure schemes which include open market housing developments) and (ii) Construction & Services (being new build housing contracting and planned and response maintenance services).

Total divisional revenue of £381m was slightly down by 1% (FY 2012: £386m), whilst operating profit of £8.6m was down 25% (FY 2012: £11.5m). Although overall performance showed an improvement in the second half, the reduction in margin in the year was driven primarily by competition and a lower margin contribution from the Construction & Services activities, offset in part by positive revenue and margin growth from the Regeneration activities.

Regeneration (28% of divisional revenue) is the key strategic focus of the division through its mixed-tenure activities. The division experienced improved conditions mainly in the second half of the year, driven by an uplift in open market house sales which were boosted by the Government's 'Help to Buy' Scheme. This contributed to a 36% increase in open market sales in the year with the average open market sales price increasing by 14% to £177,000 (2012: £155,000). Of the total number of sales, 30% were through the 'Help to Buy' scheme. The full benefit of this increase, however, was diluted by some being sales from older, lower return sites, although such sales have returned capital to the business for re-investment in newer, higher margin opportunities.

In business development, successful new awards in the year include the £269m Woolwich Estates regeneration scheme, the £78m Lymington Fields, Dagenham scheme and the division's preferred bidder status on the £30m Ponders End scheme in Enfield.

Additionally, working as a partner in the Compendium Living joint venture, considerable progress has been made on the £100m Castleward Urban Village regeneration scheme, with the first tranche of 850 homes scheduled for completion in early 2014. Compendium Living has also been appointed lead developer for the East Hull Ings regeneration scheme, transforming the area with 770 new quality homes.

Further growth opportunities in mixed-tenure schemes are anticipated from appointments on the four-year London Development Panel, expected to procure up to £5bn of housing-led mixed-use development on public land, and also on all four lots of the Homes and Communities Agency's four-year £4bn DPP2 (Delivery Partner Panel 2) housing framework.

Collaborative schemes with other Group divisions have continued to provide a strong growth platform for Affordable Housing, with the division working with both the Urban Regeneration and Construction & Infrastructure divisions and with Investments also procuring work from the division on projects in Slough and Towcester.

The regeneration & development pipeline of £715m was an increase of 102%, underpinning the future growth and profit potential of this part of the division.

Construction & Services (72% of divisional revenue) includes the new build housing contracting activities and planned and response maintenance services.

The new build housing contracting activities accounted for 24% of divisional revenue and although focus has been on maintaining a selective approach to bidding for contracts that offer clear margins and securing work through long-term frameworks, competitive pressure in the year has resulted in significantly lower revenue and margin. Additionally, increasing material and subcontractor costs were evident through the second half of the year.

In recent business development, following the year end in January 2014, the division was appointed by the Defence Infrastructure Organisation (DIO) to redevelop Beacon Barracks in Stafford. The division will work with the DIO under a £51m contract to deliver 346 high-quality new homes for service personnel and families alongside infrastructure improvements, on and off-site utility services and landscaping, with completion expected in summer 2015. Other appointments won on major house-building and development frameworks include the £1bn four-year Circle Housing Group framework.

The committed order book for the division's new build housing construction activities increased by 25% to £581m compared to the prior year end.

The Planned Maintenance business (30% of divisional revenue) has broadly maintained its overall revenue against the backdrop of a declining market, as housing associations and local authorities reduce their Decent Homes programmes. It is anticipated that this gap will be partially filled by the division's expertise in energy efficiency that has led to securing several projects funded or part-funded by ECO (Energy Companies Obligation), although the opportunities from this are now expected to be lower than previously projected.

Response Maintenance (18% of divisional revenue) has had a difficult year, with contract expiries outweighing the impact of new business wins resulting in lower revenue. Margin has been squeezed as a result of the lower volumes and the investment required in overhead and infrastructure. Operational focus is on business development and on positioning the business to pursue the significant opportunities available in the market, which are required to deliver sustained profitable growth.

Looking ahead, the division will maintain its strategic focus on developing and winning opportunities on complex mixed-tenure schemes and on capitalising on opportunities via long-term framework positions. It is expected that 2014 will see an increase in working capital investment, required to develop these newer and more profitable mixed-tenure schemes, although the profit benefit of these will not be seen until 2015 and beyond. Additional challenges in relation to increasing material and subcontractor costs, together with skills availability, will place further pressure on the overall divisional margin.

Urban Regeneration revenue has remained level with the prior year at £62m (FY 2012: £62m), whilst the order book and the regeneration & development pipeline have both increased, which is reflective of the positive progress made through the year in ensuring schemes are well placed to capitalise as the market recovers. Operating profit reduced to £1.0m, which reflects the nature of the business where the timing of profit recognition depends on the mixture of schemes and stages of completion.

Levels of activity across the division's portfolio of 35 active projects have been, and are currently, significantly higher than in previous years, with £250m of construction contracts placed during the year across a broad mix of residential, commercial and leisure.

In looking to capitalise on the Government's commitment to support residential development, £70m of Government funding has been secured by the division, helping to unlock stalled housing developments including the first phase of Wapping Wharf, a 250,000 sq ft mixed-use development in Bristol. As part of funding conditions, a number of residential developments have been brought forward and 1,200 residential units are now under construction over 12 projects.

Forward funding from British Steel Pension Fund and Canada Life has enabled site starts on KPMG's pre-let regional headquarters in Leeds and the first phase of the £100m Grand Central scheme in Stockport and 216 residential units have been forward sold in Reading and Manchester.

£200m of new development agreements have been secured on major regeneration schemes in Aberdeen and South Shields. In addition, the division was selected in November as Lambeth Council's partner for a project across three sites in Brixton town centre, with a value of circa £140m. Elsewhere, a prestigious letting for a combined John Lewis at home and Waitrose store was secured at Basing View and a detailed planning application for the first phase of development submitted.

Planning consents have been secured on seven major projects with a total development value of £140m and construction has started on 13 new sites. New start-ups in the year include major developments in Leeds, Salford, Reading and the second phase of the 125-home Stockton Northshore Vivo residential scheme under development in partnership with Affordable Housing and the Homes and Communities Agency. The division continues to add value to partnerships through the Group's integrated capability and has procured work from the Construction & Infrastructure and Affordable Housing divisions on four major schemes.

Looking ahead, Urban Regeneration's current pipeline of opportunities places the division in a good position to benefit from market improvements in 2014 and beyond and to deliver significantly increased profits as schemes mature. On the commercial side, emerging occupier confidence, high levels of lease expiries and a generally supply-constrained market should enable the division to benefit, whilst on the residential front, the continuing demand for housing aligned with Government support for homebuyers and the expected growth of the institutional private rented sector, should allow Urban Regeneration to maximise the returns from its investments. As these markets improve and more schemes become active, further working capital investment will be required to support the increased activity.

The strategic rationale for the Investments division remains the creation of investments which will provide prime long-term construction opportunities for other divisions within the Group working with both the public and private sector. The division is focused on helping partners realise the potential for under-utilised property assets and promote economic growth, predominantly through long-term strategic partnerships with the public sector. It has developed a particular expertise in strategic property partnerships, including Local Asset Backed Vehicle (LABVs) joint ventures and land swaps through which the division identifies innovative structuring and financing solutions and provides development expertise.

During the year, the continued strategy of recycling capital from mature investments has resulted in the disposals of interests in the Wigan Life Centre scheme for £6.6m (profit £1.5m), the Miles Platting social housing PFI scheme for £8.4m (profit of £4.4m) and the Tayside Acute Adult Mental Health scheme in Scotland for £8.8m (profit of £4.0m).

Flagship regeneration schemes include the £500m 20-year Bournemouth Town Centre LABV and the £1bn 15-year Slough Borough Council LABV, where both joint ventures have procured work from other Group divisions (Affordable Housing and Construction & Infrastructure).

In Bournemouth, three projects with a £39m gross development value are underway and in Slough the £16m community development "The Curve" is on site, with further construction opportunities for Group divisions scheduled within both project development programmes next year. Investments is also progressing the £38m mixed-use Towcester Regeneration and Civic Accommodation project as lead developer in partnership with both Affordable Housing and Construction & Infrastructure.

In Scotland, the Investments division is leading the WellSpring Partnership which is delivering £200m public sector health and education projects over the next nine years for the Western Territory Hub Programme Board and the Scottish Futures Trust. Construction & Infrastructure will be delivering five projects valued at £48.3m for the WellSpring Partnership in 2014.

From a sector perspective, the division continues to work with the Affordable Housing division in Healthcare, as founder members of the HB Community Solutions strategic joint venture alongside HB Villages, delivering a rolling programme of new build supported living accommodation to meet the burgeoning needs of local authorities, health services and care providers across the country.

In Education, financial close has been reached on the final school to be delivered under Hull City's £400m Building Schools for the Future programme. As a member of the Hull Esteem Consortium, Investments has played a critical role in delivering the majority of the schools within the programme and is now looking to capitalise on its significant PFI expertise within the Government's £2bn Priority Schools Building Programme.

Looking ahead, the main focus for the division in 2014 will be to advance projects throughout its existing portfolio and identify opportunities for new long-term strategic partnerships where it can leverage its expertise in project finance, development and asset management alongside the strength of the Group's integrated delivery capability. With a positive pipeline of opportunities, it is expected that the division will continue to capitalise on the release of under-utilised land assets to help its partners unlock land values and fulfil regeneration ambitions.

Net finance expense. Net finance expense was £2.3m, a £1.3m increase versus FY 2012 which is broken down as follows:

Tax. A tax credit of £1.1m is shown for the year (FY 2012: charge of £3.5m). This has arisen primarily due to a deferred tax credit of £2.5m as a result of a reduction in the UK corporation tax rate (FY 2012: deferred tax credit of £1.5m). In addition, 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 improved to an inflow of £14.9m. Likewise, free cash flow improved to an inflow of £11.9m.

Net cash. Net cash at the end of the period was £69.7m, an increase of £19.3m from 1 January 2013.

Pension. As at 31 December 2013, the Group's IAS 19 gross pension liability was £9.3m (FY 2012: £10.4m) with a net liability of nil (FY 2012: £1.5m). The deficit has been calculated after updating the asset values and certain assumptions as at 31 December 2013.

Dividend. The Board of Directors has approved a final dividend of 15.0p per share (FY 2012: 15.0p), level with the prior year, resulting in a total dividend for the year of 27.0p per share (FY 2012: 27.0p).

Board changes. Steve Crummett was appointed to the Board as Finance Director, with effect from 25 February 2013. David Mulligan stood down from the Board on 25 February 2013 and left the Group on 10 April 2013. Paul Whitmore resigned as Commercial Director and left the Group on 31 December 2013.

Principal risks and uncertainties.

The Group has a clear and established risk framework in place for managing its risks. The framework is designed and operated to identify, control and mitigate any threat to the Group achieving its goals. The framework and the risks including details of the mitigations taken to manage them will be set out more fully in the risk review in the Group's 2013 annual report. The principal risks and uncertainties that the directors consider may have a material impact on the Group's performance are:

· 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.

· Strategy: The Group's strategy needs to be clearly articulated and understood to ensure successful outcomes are achieved. The Group's success is both a product of the strength of business management and its people.

· People: In a rising economic environment, it can become increasingly difficult to retain key employees, especially those targeted by competitors.

· 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.

· 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.

· Disciplined use of capital: In a rising market there is an increased risk that the terms on which the Group trades with counterparties affects 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 as a going concern.

· 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.

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 2013

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

Consolidated statement of comprehensive income

For the year ended 31 December 2013

Consolidated balance sheet

At 31 December 2013

Consolidated cash flow statement

For the year ended 31 December 2013

Consolidated statement of changes in equity

For the year ended 31 December 2013

Other reserves

Other reserves include:

· Capital redemption reserve of £0.6m (2012: £0.6m) which was created on the redemption of preference shares in 2003.

· Hedging reserve of (£0.6m) (2012: £(2.3)m) 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 (£0.4m) (2012: £nil) arising on the translation of overseas operations into the Group's functionalcurrency.

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 2013 was 575,397 (2012: 723,970) with a cost of £4.3m (2012: £5.6m).

Notes to the condensed consolidated financial statements

For the year ended 31 December 2013

1 General information

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2013 or 2012 but is derived from those accounts. A copy of the statutory accounts for 2012 was delivered to the Registrar of Companies and those for 2013 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 2013 that comply with IFRS available on the Company's website on or about 25 March 2014. 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 25 March 2014. 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 2013.

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 2012 and the period to 30 June 2013.

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 national design, construction and infrastructure services to private and public sector clients. The division works on projects, and in frameworks and strategic alliances of all sizes across a broad range of markets including commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport and water.

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

· Affordable Housing: specialises in the design and build, refurbishment and maintenance of homes and the regeneration of communities across the UK. The division operates a full mixed-tenure model creating homes for rent, shared ownership and open market sale.

· 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: realises the potential for under-utilised property assets and promotes economic growth, primarily through strategic partnerships with the public sector, by providing flexible structuring and funding solutions and development expertise. The division covers a wide range of markets including asset backed, education, health 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 2013 and the year ended 31 December 2012, 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 23.25% (2012: 24.5%) of the estimated assessable profit for the year.

In 2013 a net tax credit of £1.1m has arisen, comprising a current tax charge of £1.3m and a deferred tax credit of £2.4m (2012: net tax charge £3.5m). The deferred tax credit has arisen due to changes in the UK statutory tax rate from 23% to 20%, which reduced the net deferred tax liability by £2.5m. The current tax liability on profits was at a low effective rate because no tax liabilities are expected upon gains on disposals of investments. As set out in the table below, without these two factors the tax charge for the year would be approximately equal to tax at the UK statutory corporation tax rate:

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 23 May 2014 to shareholders on the register on 2 May 2014. The ex-dividend date is 30 April 2014.

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 £6.46 (2012: £6.41).

A total of 698,089 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 2013 (2012: 1,030,688).

9 Net cash

Borrowings of £15.0m were drawn down under the Group's existing loan facilities. The Group has committed banking facilities of £140m, of which £110m will mature in September 2015 and £30m will mature during 2016. Additional project finance borrowings of £8.1m (2012: nil) 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.

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:

In addition, during 2012, consultancy services were provided to the Company by a wholly-owned subsidiary of Chime Communications plc, of which Simon Gulliford is a director, for an amount of £0.1m. There were no amounts outstanding at the balance sheet date.

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

The amounts outstanding are unsecured and will be settled in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given to or received from related parties. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed to or owing by related parties are non-interest bearing.

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'. In previous years, the key management personnel of the Group was considered to be the directors. The prior year comparative has been restated to be on a comparable basis.

Directors' transactions

There have been no related party transactions with any director in the year or in the subsequent period to 18 February 2014.

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 18 February 2014.

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 2013, contract bonds in issue under uncommitted facilities covered £185.3m (2012: £186.5m) of contract commitments of the Group.

12 Subsequent events

Other than the disposal of the asset held for sale, there were no significant subsequent events.

Responsibility statement 

John Morgan Steve Crummett

Chief Executive Finance Director