Construction problems undermine Morgan Sindall

With contracts tendered two or three years ago still being worked on, little improvement in profit margin is expected within Morgan Sindall’s Construction & Infrastructure division until the second half of 2015 at the earliest.

At group level, Morgan Sindall revenues rose 6% in 2014 to £2,220m (2013: £2,095m).

Reported pre-tax profit was up 64% to £22.8m (2013: £13.9m).

However, excluding intangible amortisation (£2.4m), exceptional operating items (£14.7m) and deferred tax credit (£2.5m), underlying pre-tax profit was actually down 19% from £31.3m in 2013 to £25.2m in 2014. This was attributed to a small number of construction contracts in the Construction & Infrastructure division.

The Construction & Infrastructure division saw revenues dip 5% to £1,172m (2013: £1,234m) and operating profit shrink to £3.5m (2013: £12.7m). The operating margin in this division thus shrank from 1.0% to 0.3%.

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%.

In its results statement, the company said: “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.”

The company said that action had been taken to address this: “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.”

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 2012-13 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."

Morgan Sindall 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:

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