Morgan Sindall Group PLC (LON:MGNS) has announced its results for the full year ended 31 December 2023.
| FY 2023 | FY 2022 | Change | |
| Revenue | £4,118m | £3,612m | +14% |
| Operating profit – adjusted1 | £141.3m | £139.2m | +2% |
| Profit before tax – adjusted1 | £144.6m | £136.2m | +6% |
| Earnings per share – adjusted1 | 247.7p | 237.9p | +4% |
| Net cash at year end | £461m | £355m | +£106m |
| Total dividend per share | 114p | 101p | +13% |
| Operating profit – reported | £140.6m | £88.3m | +59% |
| Profit before tax – reported | £143.9m | £85.3m | +69% |
| Basic earnings per share – reported | 254.2p | 132.7p | +92% |
1 ‘Adjusted’ is defined as before intangible amortisation of £2.9m and exceptional building safety credit of £2.2m
(FY 2022: before intangible amortisation of £2.0m and exceptional building safety charge of £48.9m)
FY 2023 Summary:
· Strong revenue growth delivers record results
o Revenue up 14% to £4.1bn
o Adjusted profit before tax up 6% to £144.6m
· Continued balance sheet strength
o Net cash of £461m (FY 2022: £355m)
o Average daily net cash of £282m (FY 2022: £256m), slightly ahead of previous guidance
· High quality and growing secured order book
o Order book of £8.9bn, up 5% on prior year (FY 2022: £8.5bn)
· Total dividend up 13% to 114p per share
· Continued leadership in sustainability
o MSCI ‘AAA’ rating retained again for Group’s ESG performance
o CDP ‘A’ rating retained again for Group’s leadership on climate change
· Divisional highlights
o Continued market-leading performance from Fit Out; operating profit up 38% to £71.8m (FY 2022: £52.2m) with revenue up 14% to £1,105m (FY 2022: £967m) and operating margin of 6.5% (FY 2022: 5.4%)
o Good performance from Construction; revenue up 18% to £967m (FY 2022*: £820m) at an operating margin of 2.7%. (FY 2022*: 2.8%). Operating profit1 up 15% to £25.9m (FY 2022: £22.6m)
o Strong profit and margin growth from Infrastructure; operating profit up 31% to £38.5m (FY 2022: £29.5m), with revenue up 15% to £887m (FY 2022*: £768m) at an operating margin of 4.3% (FY 2022*: 3.8%)
o Cost pressures and ongoing operational challenges impact Property Services; operating loss1 of £16.8m (FY 2022: operating profit £4.3m). Remediation programme on track to return to profit in 2025
o Robust performance from Partnership Housing against challenging market conditions; revenue up 20% to £838m (FY 2022: £696m), with operating profit1 18% lower at £30.5m (FY 2022: £37.4m) and average capital employed over the year of £255m (FY 2022: £197m)
o Progress made on long-term regeneration schemes in Urban Regeneration; operating profit1 of £14.8m (FY 2022: £18.9m) and average capital employed over the year of £99m (FY 2022: £97m)
* Prior year comparatives adjusted for revised business segments
1 ‘Adjusted before intangible amortisation of £2.9m and exceptional building safety net credit of £2.2m
Commenting on today’s results, Morgan Sindall Chief Executive, John Morgan said:
“2023 was another record year for the Group and these strong results reflect the high quality of our operations and the talent and commitment of our people.
Despite facing market headwinds in the year and the disappointing losses in Property Services, the diversified nature of our operations and capabilities has allowed us to continue to make significant strategic and operational progress. In addition, our focus on positive cash flow together with our strong balance sheet has positioned us well to benefit over the long term from the opportunities available in our markets.
Looking ahead, while there remains some uncertainty in the wider economy, reducing inflation and the prospect of lower interest rates provides a backdrop of confidence for the year ahead. Together with our high-quality and growing order book spread across a wide number of sectors covering the built environment, we are well-positioned for the future and on track to deliver a result for 2024 which is in line with our current expectations.”
Presentation
· There will be an analyst and investor presentation at 09.00am at Deutsche Numis, 45 Gresham Street, London EC2V 7BF on 22 February 2024. Coffee and registration will be from 08.30am.
· A copy of these results is available at: www.morgansindall.com
· The presentation will be available via live webcast from 09.00am on 22 February 2024 at www.morgansindall.com.
Group Strategy
The Group’s strategy is focused on its well-established core strengths of Construction and Regeneration in the UK. The Group has a balanced business which is geared toward the demand for affordable housing, urban regeneration and infrastructure and construction investment.
Morgan Sindall’s recognised expertise and market positions in affordable housing (through its Partnership Housing division) and in mixed-use regeneration development (through its Urban Regeneration division) reflect its deep understanding of the built environment developed over many years and its ability to provide solutions for complex regeneration projects. As a result, its capabilities are aligned with sectors which support the UK’s current and future regeneration and affordable housing needs.
Through both its Construction and Infrastructure divisions, the Group is also well positioned to meet the demand for ongoing investment in the UK’s physical infrastructure, while its geographically diverse construction activities are focused on key areas of education, healthcare and commercial.
The Fit Out division is the market leader in its field and delivers a consistently strong operational performance. Fit Out, together with the Construction & Infrastructure division, generates cash resources to support the Group’s investment in affordable housing and mixed-use regeneration. The Group also has an operation in Property Services which is focused on response and planned maintenance activities provided to the social housing and the wider public sector.
Group Structure
Under the two strategic lines of business of Construction and Regeneration, the Group is organised into six reporting divisions as follows:
Construction activities comprise the following operations:
· Construction: Focused on the education, healthcare, commercial, industrial, leisure and retail markets
· Infrastructure: Focused on the highways, rail, energy, nuclear and water markets. It also includes the BakerHicks design activities based out of the UK and Switzerland
· Fit Out: Focused on the fit out of office space with opportunities in commercial, central and local government offices and further education
· Property Services: Focused on response and planned maintenance activities provided to the social housing and the wider public sector
Regeneration activities comprise the following operations:
· Partnership Housing: Focused on working in partnerships with local authorities and housing associations. Activities include mixed-tenure developments, building and developing homes for open market sale and for social/affordable rent, ‘design & build’ house contracting and planned maintenance & refurbishment
· Urban Regeneration: Focused on transforming the urban landscape through partnership working and the development of multi-phase sites and mixed-use regeneration
Basis of Preparation
In addition to presenting the financial performance of the business on a statutory basis, adjusted performance measures are also disclosed. Refer to the Other Financial Information section which sets out the basis for the calculations. These measures are not an alternative or substitute to statutory UK IAS measures, however are seen as more useful in assessing the performance of the business on a comparable basis and are used by management to monitor the performance of the Group.
In all cases the term ‘adjusted’ excludes the impact of intangible amortisation of £2.9m and of the exceptional building safety credit of £2.2m. For FY 2022, ‘adjusted’ excluded the impact of intangible amortisation of £2.0m and of the exceptional building safety charge of £48.9m.
Group Operating Review
Summary Group financial results
The Group delivered a strong performance in 2023 against a difficult market backdrop. The results were another record for the Group and reflected the strength and breadth of the Group’s operations and the talent and commitment of its people.
Group revenue increased by 14% up to £4,118m (FY 2022: £3,612m), while adjusted operating profit increased 2% to £141.3m (FY 2022: £139.2m). Adjusted operating margin was 3.4%, 50bps lower than the prior year (FY 2022: 3.9%).
The Group benefited from higher interest rates on its cash balances compared to the prior year period, with a net finance income of £3.3m (FY 2022: expense of £3.0m) resulting in adjusted profit before tax of £144.6m, up 6% (FY 2022: £136.2m).
An exceptional Building Safety credit of £2.2m was recognised in the year compared to a charge of £48.9m in the prior year. The credit arose as a result of a better estimate of expected costs and recoveries and this movement was the main driver of the 69% increase in the statutory profit before tax to £143.9m (FY 2022: £85.3m).
The adjusted tax charge for the period was £29.9m (statutory tax charge of £26.2m), an effective rate of 20.7% on adjusted profit before tax. This was lower than the UK statutory rate for the year of 23.5% primarily due to a number of items relating to prior years.
The adjusted earnings per share increased 4% to 247.7p (FY 2022: 237.9p), while the statutory basic earnings per share of 254.2p was up 92% (FY 2022: 132.7p), with the increase on prior year again driven by the change in the exceptional Building Safety credit/charge.
General market conditions
The challenging general market conditions coming into the year continued to ease throughout, with inflation falling in most areas. Although still a headwind for the Group, the general trading environment became more manageable and predictable as the year progressed.
During the year, however, the ongoing stability of the supply chain has become more uncertain with liquidity issues increasingly common, requiring additional vigilance both pre-construction and during the delivery of projects. The risk is mitigated to some extent by the diligence taken before project commencement and the fact that no division is overly reliant on any one supplier.
In Construction and Infrastructure, where projects are currently underway, most include appropriate inflationary protection within the overall contract pricing and this is not seen as a significant risk. Where projects are being priced for future delivery, inflation continues to place some project budgets under pressure, which in turn has led to some delays in decision-making and project commencement. However, the impact of this has not been material and in many cases, any client budget constraints are being addressed by adjustments to project scopes, thereby allowing projects to proceed.
The market for Fit Out’s services has continued to be very strong, with a number of positive structural changes in the market. The main drivers of this include lease-related events, the requirement for greater energy efficiency from offices, the move towards more flexible and collaborative workspaces, the use of office space as a tool for enhancing staff retention and brand image, and office relocations to the regions with clients requiring increasingly complex projects.
In Property Services, housing maintenance and the general state of repair of housing stocks are increasingly the focus for local authorities and housing associations. During the year, the business has been severely impacted by general cost and labour inflation which has impacted the profitability of its contracts.
The general UK housing market has been difficult throughout the year, however in Partnership Housing, the partnership model focusing on long-term partnerships with the public sector has provided some level of resilience and cushion against the full impact. Although demand for contracting has remained strong, the division experienced a significant slowdown in its sales rates of private homes on its mixed-tenure sites, driven by the combination of economic uncertainty and the cost-of-living crisis, together with rising mortgage rates and the end of the Help to Buy scheme in England at the end of March. Alongside this there is the wider context of a continually challenging planning environment.
In Urban Regeneration, build cost inflation continued to provide challenges to the returns on some of its active developments and on the viability of some of its schemes being evaluated prior to commencement, although not material to the overall portfolio of schemes and their future financial performance.
Divisional performances
The Group has amended the structure of its reporting segments in the year and now reports through six divisions, with Construction and Infrastructure now being reported as separate segments (previously reported together as ‘Construction & Infrastructure’) to more appropriately reflect the separate management of these two businesses. See Note 2 of the consolidated financial statements: Business Segments.
Construction continued with its disciplined focus on operational delivery and contract selectivity, with its revenue increasing 18% to £967m (FY 2022: £820m1), while operating profit increased 15% to £25.9m (FY 2022: £22.6m) resulting in an operating margin of 2.7% (FY 2022: 2.8%).
Infrastructure reported a strong year of profit and margin growth. Revenue was 15% higher at £887m (FY 2022: £768m1) with operating profit of £38.5m, 31% higher than the prior year (FY 2022: £29.5m), resulting in an operating margin of 4.3% (FY 2022: 3.8%).
Fit Out had another excellent year, with profit and margin both increasing significantly. Operating profit was up 38% to £71.8m (FY 2022: £52.2m) while its operating margin increased up to 6.5% (FY 2022: 5.4) from revenue of £1,105m, up 14% (FY 2022: £968m).
Property Services had a very difficult and disappointing year with operational and market challenges leading to the division making an operating loss in the period of £16.8m (FY 2022: operating profit £4.3m).
In Partnership Housing, the resilience of the partnership model was reinforced by the increase in revenue in the year, up 20% to £838m (FY 2022: £696m), driven by an increase in contracting work. This was despite the softer housing market in the year and allowed the division to cushion the full extent of the market downturn, with operating profit down 18% to £30.5m (FY 2022: £37.4m).
Although Urban Regeneration made generally satisfactory progress with its long-term regeneration developments in the year, operating profit of £14.8m was 22% lower than the prior year (FY 2022: £18.9m) due to the scale, nature and timing of scheme completions across the overall development portfolio. The return on capital in the year was 15%.
Secured order book
The Group has a high-quality workload and maintaining contract selectivity and bidding discipline to ensure the appropriate risk balance in the order book remains key to the future success of the Group.
The total secured order book at the year end was £8,920m, up 5% on the prior year-end position (FY 2022: £8,459m).
Balance sheet & cash
The Group’s Capital Allocation Framework is set out in the separate section below.
Net cash at the year-end was £461m (FY 2022: £355m) and the average daily net cash for the year was £282m (FY 2022: £256m). The year-end cash position included £40m held in jointly controlled operations or held for future payment to designated suppliers.
Operating cash flow for the year was an inflow of £189.0m (FY 2022: inflow of £48.0m), which included an adjusted working capital inflow of £59.7m. The operating cash flow represented 134% of adjusted operating profit.
Looking ahead, the Group currently expects that the average daily net cash for 2024 will be in excess of £300m.
Dividend
The proposed final dividend has increased by 15% to 78p per share (FY 2022: 68p), resulting in a total dividend for the year of 114p per share (FY 2022: 101p), an increase of 13%. This represents dividend cover of 2.2x and reflects the result for the year, the strong balance sheet and the Board’s confidence in the long-term prospects of the Group.
As part of the Capital Allocation Framework below, the Board operates a formal dividend policy such that dividend cover is expected to be in the range of 2.0x-2.5x on an annual basis.
1 Prior year comparative revenue and margin adjusted for revised business segments. See Note 2 of consolidated financial statements
Outlook
Group outlook for 2024
While there remains some uncertainty in the wider economy, reducing inflation and the prospect of lower interest rates provides a backdrop of confidence for the year ahead. Together with its high-quality and growing order book spread across a wide number of sectors covering the built environment, Morgan Sindall is well-positioned for the future and on track to deliver a result for 2024 which is in line with its current expectations.
The 2024 outlook for each division is detailed in the Divisional Review.
Medium-term divisional targets
To provide a framework for future performance, each division operates to a medium-term financial target or set of targets and are referred to in the Business review.
The targets were originally set in February 2022. Subsequently, the medium-term target for Fit Out was significantly upgraded in February 2023 and then again in August 2023, while the target for Property Services was downgraded in August 2023 to reflect its current performance.
| Division | Target |
| Construction | Operating margin of 2.5% – 3% paRevenue of £1bn |
| Infrastructure | Operating margin of 3.5% – 4.0% paRevenue of £1bn |
| Fit Out | Annual operating profit of £50m – £70m |
| Property Services | Annual operating profit of £7.5m |
| Partnership Housing | Operating margin of 8% / return on capital up towards 25% |
| Urban Regeneration | 3-year rolling average return on capital up towards 20% |
