Overview
Morgan Sindall Group PLC (MGNS) is a London-headquartered leading UK construction and regeneration group which operates nine separate businesses and specialises in construction, regeneration, property services, infrastructure, fit out, housing and development. The company was formed and listed on the London Stock Exchange in 1994 with a reverse takeover of William Sindall PLC, after John Morgan and Jack Lovell founded Morgan Lovell in 1977. By focusing on its target markets, the company seeks to drive long-term profit and social value and grow the business organically. While Morgan Sindall Investments generates opportunities for company businesses to work together, the group uses the cash from its construction activities to invest in regeneration schemes. Around 6,600 people with a broad range of expertise are employed with the group, and it has invested in technology to create safer and more efficient processes.

The group is a holding company, which comprises of 9 different businesses. Morgan Sindall Construction provides construction services in retail, leisure, industrial, commercial, defence, healthcare and education, while Morgan Sindall Investments offers the company with construction and regeneration opportunities to develop under-utilised public land. Morgan Sindall Infrastructure offers services in the nuclear, water, energy, aviation, rail and highways markets, while Morgan Sindall Property Services undertakes response and planned maintenance services for social housing and the wider public sector in the country. Morgan Lovell offers office interior design and builds services direct to occupiers, and Lovell Partnerships delivers housing for open market sale, shared ownership, private renting or affordable rent. The group also owns Muse Developments, Overbury and BakerHicks, with each specialising in different fields.

Key Statistics


Management

Michael Findlay has been the Non-executive Chairman of the Board since October 2016 and has spent the last 27 years in investment banking. John Morgan is the co-founder and Chief Executive Officer of the group; he was appointed in October 1994. Steve Crummett is the Finance Director; he was appointed to the position in February 2013 and has held senior finance roles with a number of groups in the past.

Segments

Under the two strategic business activities of Construction and Regeneration, the operations of the group are differentiated into six operating divisions, namely Property Services, Construction & Infrastructure, Investments, Urban Regeneration, Fit Out and Partnership Housing. The Construction & Infrastructure segments include Morgan Sindall Construction, Morgan Sindall Infrastructure and BakerHicks, which provides a multidisciplinary engineering and design consultancy. Fit Out is comprised of Morgan Lovell and Overbury, which specialises in fit out and refurbishment in retail banking, further education, central and local government offices, and commercial. Property Services offers a response and planned maintenance for social housing, and Partnership Housing delivers housing through mixed tenure and contracting activities.

Top Shareholders

 
(Source: Thomson Reuters)

Financial Highlights (H1 2019, in £m)


(Source: Company Filings)

Revenue for the period was largely at a similar level to the prior year and stood at £1,421 million(HY 2018: £1,423 million), as Construction & Infrastructure and Partnership Housing rose by 3% but Fit Out declined by 4% and Urban Regeneration was down by 29%. The secured order book, which comprises the committed order book and framework order book, at 30 June 2019 was £4,229 million, an increase of 19% from the previous year, as Construction & Infrastructure rose by 24% and Property Services increased by 33%, while total future workload of the group stood at £7.5 billion at the period end. Gross profit during the period rose slightly to £154 million from £146.2 million reported in the prior year. Operating profit before amortisation of intangible assets (adjusted operating profit) was up 18% to £37.5 million (HY 2018: £31.9 million) and reported operating profit rose by 16% to £36.7 million from £31.6 million in H1 2018. Adjusted operating margin increased by 40 basis points on the prior year to 2.6% (HY 2018: 2.2%) and increase in reported operating profit was driven by 23% increase in operating profit of Construction & Infrastructure, even though operating profit of Fit Out was down by 13% against a predicted backdrop of a general tightening in overall market conditions. As non-recourse project financing was repaid towards the end of 2018, the net finance expense was £0.5 million lower at £1.2 million (HY 2018: £1.7 million). The statutory profit before tax was £35.5 million, which represented an increase of 19% (HY 2018: £29.9 million), and the adjusted profit before tax was up by 20% over the year to £36.3 million (HY 2018: £30.2 million). Profit for the period was £28.3 million against £24.5 million in H1 2018, which corresponded to statutory earnings per share of 62.9p, up by 14% (HY 2018: 55.2p), while adjusted earnings per share increased by 15% to 64.2p (HY 2018: 55.6p). The interim dividend was increased by 11% to 21.0p per share (HY 2018: 19.0p), which was is 3.1x covered by adjusted earnings per share in the period. The average daily net cash for the period was £123 million (HY 2018: £113 million) and net cash at the period end was £114 million (HY 2018: £97 million). For the first half to 30 June 2019, there was an operating cash outflow of £74.6 million and capital employed in the construction activities rose by £61.4 million.

Key Performance Indicators (FY 2018)

Regeneration and development pipeline, which represents the share of the gross development value of secured schemes, was down by 4% on the previous year to £3,107 million with 65% of the total pipeline relating to 2021 onwards. The accident frequency rate is an indicator of reportable accidents, and it reduced by 11% as the accident incident rate fell from 199 to 180. Operating cash conversion, which is statutory cash flow from operating activities as a share of adjusted operating profit, reduced to 144% from 174% in FY 2017, though it remained strong due to a continued focus on working capital management. Return on capital employed indicated the profitability of the group, and it increased during the year in line with expectations to 13.1%. Voluntary Employee Turnover shows the employees leaving the business voluntarily, and it increased to 12%, which was above the long-term target of 10%. Gross Margin in Construction Activities improved by 80bps to 10.5%, reflecting the ongoing improved operational delivery and higher quality of work secured.

Financial Ratios

 
(Source: Thomson Reuters)

While the profitability ratio of the group was lower than the industry median, it has been gradually improving over the years, with more improvement expected in the future. The liquidity ratios of the company have remained largely flat, but a quick ratio was considerably lower than the industry. However, the company is significantly less leveraged than its peers. Further, the leverage of the group has reduced over the years. The asset turnover ratio was considerably higher than the industry, indicating optimal utilisation of resources.

Valuation Methodology
Method 1:Price/Earnings Multiple Approach (NTM)



To compare MGNS with its peers, Price/Earnings multiple has been used. The peers are Kier Group PLC(NTM Price/Earnings was 2.05), AA PLC(NTM Price/Earnings was 3.85), Costain Group PLC(NTM Price/Earnings was 5.52),Keller Group PLC(NTM Price/Earnings was 5.96),Balfour Beatty PLC(NTM Price/Earnings was 8.85) and HomeServe PLC(NTM Price/Earnings was 27.02). The mean of Price/Earnings (NTM) of the company’s peers was 8.88x (approx.).

Method 2: EV/EBITDAMultiple Approach (NTM)



To compare MGNS with its peers, EV/EBITDA multiple has been used. The peers are Kier Group PLC(NTM EV/EBITDA was 2.27),Costain Group PLC(NTM EV/EBITDA was 3.32),Keller Group PLC(NTM EV/EBITDA was 4.37), and SIG PLC(NTM EV/EBITDA was 8.48). The median of EV/EBITDA (NTM) of the company’s peers was 3.85x (approx.).

Share Price Commentary


Daily Chart as at 30-September-19, before the market closed (Source: Thomson Reuters)

On 30 September 2019, at the time of writing (before the market closed, at 11:22 am GMT), MGNS shares were trading at GBX 1,201, up by 1.2 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,398.00/GBX 1,000.00. The company's stock beta was 0.76, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £539.37 million with a dividend yield of 4.64 per cent.

Growth Prospects and Risks Assessment

According to a report by the National Housing Federation, the country has a shortfall of four million homes, and it would need to build 145,000 affordable homes a year until 2031, providing the company with an opportunity as it seeks to deliver mixed-tenure homes in partnerships with local authorities and housing associations. This is further supported by adept cash management and strength in the balance sheet, providing significant financial security for all stakeholders and allowing the group to make the right long-term decisions for the business. The need for investment in infrastructure, urban regeneration and the increasing demand in the UK for affordable housing augurs well for the company, which offers a balanced business that fits well in the demands by society. In the financial year 2019, the company expects full-year to be slightly ahead of its previous expectations, given the strong first-half performance.

While the Brexit negotiations had a limited impact on the markets of the group, the wider housing market and thus, sales volumes can be impacted by a hit to consumer confidence due to a no-deal Brexit scenario. Moreover, longer-term effects remain difficult to predict as there could be less profitable opportunities in the chosen markets. Potential skills deficiencies due to difficulties in obtaining EU workers within the supply chain and increased material costs as a result of depreciation in sterling also remains a threat to the company.

Conclusion

Over the last three years until FY 2018, the company rose dividend by 22% each year. In the last 5 years, revenue rose by a CAGR of 4.29%, while gross profit rose by a CAGR of 9.94%, indicating the improving cost efficiency of the group. Operating income was also up by a CAGR of 20.34% over the last four years and net income rose by a CAGR of 22.66%.Strong operational progress made across the company during the latest period and the company is increasingly focusing on better quality total future workload.

Based on the decent prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 1,186.00 (as on 27 September 2019) with low double-digit upside potential based on 8.88x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 3.85x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*The Buy recommendation is valid for the current price as covered in the report (as on 30-September-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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