Morgan Sindall Group Regulatory News (MGNS)

5 Aug 2013 07:00



5 August 2013

MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'Group')

The Construction & Regeneration Group

RESULTS FOR THE HALF YEAR (HY) ENDED 30 JUNE 2013

HY 2013 highlights:

·; Revenue of £1,019m, up 2% on prior year (HY 2012: £1,000m). Order book up 1% from FY 2012.

·; Adjusted1 operating profit of £16.2m (HY 2012: £20.8m), with adjusted operating margin1 of 1.6% (HY 2012: 2.1%).

·; Adjusted1 EPS down 18% to 31.5p (HY 2012: 38.4p).

·; Good progress on cash management, with net cash of £40m and improved average daily net debt of £32m (HY 2012: net debt of £12m and average daily net debt of £36m).

·; Exceptional charge of £13.0m taken as a provision against amounts recoverable on a small number of older construction contracts. There are no associated cash outflows with the provision.

·; Interim dividend of 12.0p per share, level with prior year (HY 2012: 12.0p per share).

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

"The first half has seen difficult market conditions across all of our markets, with competitive pressures impacting on margins and profitability. The improved positive cash position, however, demonstrates the underlying strength of the business and the benefit of a sustained focus on cash management, which will remain.

Looking ahead to the second half, overall market conditions are not expected to significantly improve. The business will continue to focus on cash management and will look to improve the order book selectively, such that it is well-positioned to take advantage of the growth and investment opportunities in its markets as they arise."

The term 'adjusted' excludes the impact of intangible amortisation and exceptional operating items. 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 HY 2013, intangible amortisation was £1.4m (HY 2012: £1.5m) and exceptional operating items were £13.0m (HY 2012: £nil).

Revenue for the period was 2% up on the prior year at £1,019m. The Group order book as at 30 June 2013 was £3.1bn, an increase of 1% since the year end. The regeneration pipeline was £2.2bn, up on the year end by 5%.

The adjusted1 gross margin reduced 120bps to 8.1% (HY 2012: 9.3%), significantly impacted by increased competitive market pressures across all the operating divisions.

Adjusted1 operating profit of £16.2m was 22% down on the prior year, with adjusted1 operating margin of 1.6% (HY 2012: 2.1%). This included profit from the sale of investments in the Access for Wigan scheme (£1.5m) and the Miles Platting PFI scheme (£4.4m).

The net finance expense increased to £0.8m (HY 2012: £0.5m) driven by a reduction in the interest received from joint ventures. The effective tax rate reduced to 14% (HY 2012: 20%), as the profit on the sale of investments is treated as non-taxable.

As a result, adjusted1 earnings per share of 31.5p was 18% down on the prior year; fully diluted adjusted1 earnings per share of 31.3p was 16% down on the prior year.

Exceptional operating items of £13.0m have been charged in the period as a provision against amounts recoverable in relation to a small number of construction contracts held on the balance sheet under Amounts Due From Construction Contract Customers and Trade Receivables.

The Board, having received legal advice and opinion, believes that these amounts are recoverable. However, based upon an assessment of current progress made towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery, the Board believes it is now appropriate to provide against these balances to an amount it considers is a prudent estimate of overall likely resolution.

This charge is non-cash in nature, such that there are no associated cash outflows.

The result is that after charging exceptional operating items, the reported profit before tax for the period was £1.0m (HY 2012: £18.8m). Basic earnings per share was 5.4p (HY 2012: 35.8p).

The key focus on cash flow over the period has seen positive benefits, with the average daily net debt for the period of £32m being an improvement on the same period last year (£36m) and on the second half of last year (£45m). The Group had net cash of £40m as at 30 June 2013, again a significant improvement on the prior year when the Group was in a net debt position of £12m.

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 strategic investments as they arise. Total committed facilities are now £125m, of which £110m expire in September 2015 and £15m in May 2016.

The interim dividend of 12.0p per share has been held level with the prior year (HY 2012: 12.0p).

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

Order book

The total Group committed order book at 30 June 2013 was £3.1bn, an increase of 1% since the year end. The divisional split is shown below.

Additionally, the regeneration pipeline for the Group was £2.2bn (being the Group's share of the gross development value of committed schemes), an increase from the year end of 5%.

As expected, Construction & Infrastructure has experienced challenging market conditions throughout the period, with significant competitive pressure impacting on gross margin. Although divisional revenue of £593m was 2% up on the prior year (HY 2012: £583m), operating margin reduced to 1.1%. The ongoing management of overheads and the benefit of the cost reductions announced in November 2012 could only mitigate in part the full impact of market pressures at the gross margin level.

The order book has increased 3% since the year end, which provides confidence in future volumes and activity. Of the total, the second half of 2013 is fully committed, with 43% of 2014 already committed, this being ahead of the same time last year (HY 2012: 41%). The division's commitment to Perfect Delivery and operational excellence, as well as robust bid selection, should enable it to generate appropriate returns moving forward.

Across the division, Transport (Rail, Aviation, Roads), at 26% of divisional revenue, is a key strategic growth area, with the construction of the Network Rail operating centres in Manchester and Rugby in Rail utilising the division's capabilities in this market. Similarly for Roads, the division maintains a key strategic relationship with the Highways Agency, implementing a number of managed motorway and other schemes, whilst the division's existing specialist expertise in Aviation was reinforced in the period by the commencement of the high profile Heathrow Airport runway refurbishment project. Education remains one of the largest served markets (26% of revenue), with other significant markets being Water (14% of revenue) and Commercial (10% of revenue).

By type of activity, the Construction business, which accounts for 56% of the total revenue of the division (HY 2012: 58%), has seen significant regional variation in activity levels, with London and the South benefiting whilst the North has been impacted by lower volumes and increased competition. In Infrastructure (44% of divisional revenue) (HY 2012: 42%), growth has been driven by tunnelling activities, primarily as a result of a full period of activity on Crossrail as well as on the Lee Tunnel project for Thames Water. Work has commenced at the Sellafield site following the award made in December 2012 to Morgan Sindall, in joint venture, to provide a range of infrastructure asset services to the Sellafield site worth up to a potential £1.1bn. The joint venture took over responsibility for a number of projects on site in May 2013 and master planning and studies work has commenced on a range of these.

Exceptional operating items of £13.0m have been charged in the period as a provision against amounts recoverable in relation to a small number of construction contracts held on the balance sheet under Amounts Due From Construction Contract Customers and Trade Receivables.

Looking ahead, it is not expected that general market conditions will significantly improve throughout the second half of 2013 and focus will remain on operational delivery and informed bid selection.

There has been no significant change in the Fit Out market conditions throughout the period, with strong market competition at the tender stage impacting on divisional margin. Revenue was up 6% on the prior year, however operating margin of 2.5%, was down 40bps (HY 2012: 2.9%). The order book of £136m is down 20% from the year end although this is considered to be just short-term timing issues at the period end rather than any longer-term trend.

Activity has been weighted towards refurbishment in occupation work, compared to new office fit outs. The London office market, which accounts for broadly two thirds of divisional revenue, has seen the technology and media sectors being the most active in taking up office space.

Besides the traditional office corporate business, the division has also seen solid growth in the university sector, and whilst public sector work has generally been relatively slow, the division has increased its presence with a number of notable local authority project wins.

During the period, two workplace consultancy projects have converted into higher margin full service design and build projects and this innovative approach to value generation is a key differentiator and strategic focus for the division. Further, the division has gained its first fit out project as a result of a referral through its international alliances and this new business channel using a network of overseas alliances is seen as an important opportunity for future growth.

Looking forward, there is emerging evidence of an increasing level of pre-lets, with larger corporates securing office space for 2015-6 occupation. Although 2013 is expected to remain challenging, the strong market position of the division and the focus on operational delivery and contract selectivity provides confidence for when its markets recover.

Affordable Housing revenue of £185m was down 8% (HY 2012: £202m), whilst operating profit of £2.7m was down 64% (HY 2012: £7.5m). The significant reduction in overall divisional margin was driven by ongoing competition in the New Build Housing Contracting activities and a lower margin contribution from the Planned and Response Maintenance activities, offset in part by positive revenue and margin growth from mixed-tenure schemes.

The mixed-tenure activities account for 24% of divisional revenue. Within these mixed-tenure schemes, open market sales completions have increased 36% compared to the first half last year, supported by the UK Government's Help to Buy scheme. The average sales price also increased, up 11%, to £172,000 (compared to the full year average for 2012 of £155,000), however the full benefit of this increase in sales activity and price has been diluted by sales from some older, lower return sites.

Strategically, complex mixed-tenure schemes, such as the recently announced £269m Woolwich redevelopment programme and the £63m Lymington Fields, Dagenham scheme, are the major area of future focus for the division and where positive returns can be generated.

In contrast, New Build Housing Contracting (24% of revenue) has suffered a significant decline in both revenue and margin as a result of general competitive pressures in the contract new build social housing market. The Planned Maintenance business (34% of revenue) has experienced a reduction as the Decent Homes programme has tailed off, whilst the Response Maintenance business (18% of revenue) requires new contract wins to replace contract expiries and to provide the critical mass to fully leverage the benefits of scale.

The second half of 2013 is not expected to show any significant change in market conditions, with expected continued growth in mixed-tenure schemes being offset by pressures in New Build Housing Contracting, Planned Maintenance and Response Maintenance.

Urban Regeneration has made positive progress over the first half. Activity on a range of its schemes has significantly increased, thereby driving the increase in revenue to £34m (HY2012: £23m), however due to timing of profit recognition from the current mixture of schemes, operating profit has reduced to £0.4m. The regeneration pipeline remains strong at £2.2bn, up 5%, which is the division's share of the gross development value of committed schemes.

Against the positive backdrop of the Government focus on residential development and the emerging private rental sector investment market, there has been increased activity over the period on a number of the division's pipeline schemes.

Operational site starts on schemes in Leeds, Doncaster, Salford, Canning Town, Manchester, Reading, Plymouth and Stockport have been supported by pre-letting and forward funding in Leeds and Stockport and the forward sale of residential units in Reading. Planning has also been secured for new projects in Lewisham and Chester which, together with the existing schemes on site, will require working capital investment over the next 18 months and a likely increase in capital employed through the second half of 2013.

Looking ahead, it is anticipated that the division is well-placed to benefit from these positive developments in 2014 and beyond and to move towards its longer-term target of achieving a 15% return on capital employed over the course of the cycle.

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.

The success of this strategy has been clearly demonstrated in the first half of 2013 through the positive pipeline of opportunities for investment and construction afforded through its strategic partnerships with the public sector, specifically LABVs (Local Asset Backed Vehicles) at Slough and Bournemouth.

The recycling of capital from mature investments has also continued, with the successful disposals of interests in the Access for Wigan scheme for £6.6m (profit: £1.5m) and the Miles Platting social housing PFI scheme for £8.4m (profit: £4.4m). Suitable future opportunities to recycle its investments will be reviewed as they arise.

The division retains a positive pipeline of opportunities based around its core skills of innovative structuring and financing of deals, which allow its partners to realise the potential of under-utilised property assets, secure efficiencies and promote economic growth.

Net finance expense. Net finance expense was £0.8m, a £0.3m increase versus HY 2012 which is broken down as follows:

Tax. A tax credit of £1.2m is shown for the six month period (HY 2012: charge of £3.6m, FY 2012: charge of £3.5m). This tax credit has arisen because no tax liability is expected upon the gains on disposals of investments which occurred during the six months, whilst the remaining net income will attract tax relief with an effective tax rate approximating to the UK statutory rate.

The tax credit for the six month period does not take into account the expected reductions in the UK statutory tax rate to 20%, which is expected to create a £2.5m tax credit for 2013 during the second half of the year. The tax credit will arise through revaluation of the Group's net deferred tax liabilities.

Net working capital. 'Net Working Capital' is defined as 'Inventories plus Amounts Due from Construction Contract Customers plus Trade & Other Receivables, less Trade & Other Payables, less Amounts Due to Construction Contract Customers'.

Cash flow. Operating cash flow improved significantly to an outflow of £19.2m. Likewise, free cash flow improved to an outflow of £21.1m.

Net cash. Net cash at the end of the period was £39.7m, a reduction of £10.7m from 1 January 2013.

Pensions. As at 30 June 2013, the Group's IAS 19 gross pension liability was £9.9m (HY 2012: £9.4m) with a net liability of £1.4m (HY 2012: £1.0m). The deficit has been calculated after updating the asset values and certain assumptions as at 30 June 2013.

Dividends. The Board of Directors has approved an interim dividend of 12.0p per share (HY 2012: 12.0p), level with the prior year.

Board appointment. 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.

Principal risks and uncertainties. The principal risks and uncertainties that the directors consider may have a material impact on the Group's performance in the remaining six months of the year are unchanged from those described in the Risk Review section on pages 36 to 41 of the Group's most recent Annual Report and Accounts. These risks are:

·; Markets - the markets in which the Group operates are affected to varying degrees by general macroeconomic conditions. The Group is particularly focussed at present on managing the impact of the challenging economic conditions, changes in Government spending priorities and the increasing emphasis on infrastructure investment.

·; Strategy - the Group's strategy needs to be clearly articulated and understood to ensure successful outcomes are achieved.

·; Capable teams - the Group's health, safety and environmental performance and business conduct affects employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance. In a challenging climate, it can become increasingly difficult to retain key employees, especially those targeted by competitors.

·; Select right opportunities - 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.

·; Distinctive approach - 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.

·; Successful outcomes - the terms on which the Group trades with counterparties affect its liquidity. Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern.

The directors have considered these risks in the context of the current economic conditions in the Eurozone. They are satisfied that the Group does not have significant direct exposure to the Eurozone as the majority of its operations are carried out in UK markets and its financing arrangements are predominantly with UK financial institutions.

Looking ahead to the second half, overall market conditions are not expected to significantly improve. The business will continue to focus on cash management and will look to improve the order book selectively, such that it is well-positioned to take advantage of the growth and investment opportunities in its markets as they arise.

Presentation

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

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

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.

Notes to Editors

Morgan Sindall Group

Morgan Sindall Group plc is a leading UK construction and regeneration group with a turnover of £2 billion, employing around 6,400 employees and operating in the public and commercial sectors. It operates through five divisions of construction and infrastructure, fit out, affordable housing, urban regeneration and investments.

Condensed consolidated income statement

For the six months ended 30 June 2013

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

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2013

Condensed consolidated balance sheet

At 30 June 2013

Condensed consolidated cash flow statement

For the six months ended 30 June 2013

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2013

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2012

Condensed consolidated statement of changes in equity

For the year ended 31 December 2012

Share premium account

The share premium account represents the difference between the fair value of consideration received and the nominal value of the shares issued.

Capital redemption reserve

The capital redemption reserve was created on the redemption of preference shares in 2003.

Reserve for own shares held

The shares 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 30 June 2013 was 641,618 (30 June 2012: 729,688, 31 December 2012: 723,970).

Hedging reserve

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 venture.

Notes to the condensed consolidated financial statements

For the six months ended 30 June 2013

1 Basis of preparation

General information

The financial information set out in this half year report does not constitute the Company's statutory accounts for the year ended 31 December 2012. A copy of the statutory accounts for that year was delivered to the Registrar of Companies. 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 half year report has not been audited or reviewed by the auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information. Figures as at 30 June 2013 and 2012 and for the six months ended 30 June 2013 and 2012 are therefore unaudited.

Basis of preparation

The annual financial statements of Morgan Sindall Group plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this half year report were prepared in accordance with IAS 34 'Interim Financial Reporting'. While the financial information included in this half year report was prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this half year report does not itself contain sufficient information to comply with IFRS.

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.

Changes in accounting policies

In the current financial year, the Group has adopted the amendments to IAS 1 "Presentation of Items of Other Comprehensive Income", IAS 19 (revised 2011) "Employee Benefits" and IFRS 13 "Fair Value Measurement". Otherwise, the same accounting policies, presentation and methods of computation are followed in the condensed consolidated financial statements as applied in the Group's latest annual audited financial statements.

Tax

A tax credit of £1.2m is shown for the six month period (30 June 2012: charge of £3.6m, 31 December 2012: charge of £3.5m). This tax credit has arisen because no tax liability is expected upon the gains on disposals of joint ventures which occurred during the period, whilst the remaining net income will attract tax relief with an effective tax rate approximating to the UK statutory rate.

The tax credit does not take into account the expected reduction in the UK statutory tax rate from 23% to 20% as it was not substantively enacted at the balance sheet date. We estimate that this future change will reduce our deferred tax liability by £2.5m in 2013, giving rise to a deferred tax credit in the second half of the year.

Seasonality

The Group's activities are generally not subject to significant seasonal variation.

2 Business segments

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

·; Construction and Infrastructure: offers national design, construction and infrastructure services to private and public sector clients. The division works on projects and frameworks of all sizes across a broad range of sectors including commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport, and water.

·; Fit Out: specialises in fit out and refurbishment projects in the commercial and government office, education, retail, technology and leisure markets. Overbury operates as a national fit out company through multiple procurement routes and Morgan Lovell specialises in the 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 projects. Typically creating commercial, retail, residential, leisure and public realm facilities.

·; Investments: facilitates project development, primarily in the public sector, by providing flexible financing solutions and development expertise. The division covers a wide range of markets including urban regeneration, education, healthcare, housing, emergency services, defence and infrastructure.

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

During the six months to 30 June 2013, six months to 30 June 2012 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.

3 Exceptional operating items

An exceptional charge has been taken in the period as a provision against amounts due from construction contract customers and trade receivables in relation to a small number of construction contracts. The Board, having received legal advice and opinion, believes that these amounts are recoverable. However, based upon an assessment of current progress made towards recovering these amounts and the expected time, cost and associated risk of pursuing legal remedies to achieve recovery, the Board believes it is now appropriate to provide against these balances to an amount it considers is a prudent estimate of overall likely resolution.

In 2012, the Group undertook a reorganisation. The exceptional items relate to the cost of reorganising its network of offices and comprise redundancy and property related costs.

4 Dividends