Regeneration group builds a firm profit base
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JOHN MORGAN and Jack Lovell were 21-year-old graduates when they decided to start their own business, fitting out offices for American banks moving to London. Young, newly qualified surveyors, they fancied trying their luck as entrepreneurs. That was in 1977 and the firm made £30,000 in its first year.
Today, annual turnover exceeds £2.5 billion and Morgan Sindall – as it is now known – is valued on the stock market at more than £620million. Morgan is still chief executive and owns 10 per cent of the shares. Lovell retired 15 years ago but retains a 5 per cent stake.
Their continued faith in the group is a sign of both commitment and confidence.
The shares closed on Friday at 1412p, having dropped almost 6 per cent during the week. The fall was undeserved. Morgan Sindall is motoring and Morgan, 61, believes the best is yet to come.
In the early days, Morgan Sindall focused on fitting out offices and that remains a significant part of the business, responsible for around 40 per cent of total profits.
The group has also branched out in the past 20 years. There is a large construction and infrastructure division, building schools, hospitals and offices, upgrading roads, maintaining runways and contributing to major projects such as Crossrail and refurbishing Paddington station in London.
Much of that business involves working with government and local authorities. And Morgan Sindall has a sizeable regeneration business too, focused on major, longterm, redevelopment projects in areas such as Salford and Slough. This division includes a housebuilding arm, centred on social housing, in partnership with housing associations and local authorities. There is a small property services arm too, principally focused on social housing repairs and maintenance.
The company’s activities are wide-ranging but there is a determination across the group to improve service and increase margins.
This focus is delivering results. A trading update at the beginning of the month said 2017 results would be ahead of expectations, with orders up compared to last year and a good pipeline of new business.
This was the third positive trading update this year, prompting analysts to upgrade figures for this year and next. Brokers now expect 2017 profits to surge by 44 per cent to around £65million, increasing to at least £71million next year. A dividend of 42p is pencilled in for this year, rising to 46p next. The company’s performance and prospects are impressive, particularly as the group went through extremely hard times after the financial crisis and was expected to suffer materially from the Brexit vote. Profits at the fit-out division were forecast to plummet after the referendum result, but it has proved resilient and delivered profits every year for four decades. These are expected to increase, by taking market share from competitors and improving profit margins.
The construction and infrastructure business is also gaining ground, not least by being more selective in the contracts it pursues, choosing the ones where it believes it can really shine.
The focus on profit margins is understandable. In 2016, Morgan Sindall sales were £2.56billion, yet profits were £45 million, equivalent to a profit margin of little more than 1.7 per cent. Morgan is keen to increase this to more than 2 per cent and he is well on the way, meaning that profits and dividends should increase at a faster rate than turnover over the next few years. Morgan himself was chief executive until 2000, took a back seat for 12 years and returned to the helm in 2012, by which time the group was in a bad way and the shares were less than 500p. He changed 18 of the 20 most senior people in the first nine months and has since concentrated on doing what customers want, winning new business, where appropriate, and making sure there is plenty of cash in the bank.
Midas verdict: John Morgan has spent years steering Morgan Sindall but he remains fiercely ambitious for the company he co-founded. The group should benefit from the Government’s oft-stated aim to upgrade UK infrastructure and make Britain’s cities better places to live. Persistent improvements to the way that Morgan Sindall does business should also drive profits growth. At 1412p, the shares are a buy.
Traded on: Main market Ticker: Mgns Contact: morgansindall.com or 01788 534 500