The deteriorating economy has demolished most British construction firms over the past 18 months. Morgan Sindall is one such victim, with its shares down nearly 70% since peaking at £17.70 back in mid-2007. However, this slump looks overdone.
Morgan Sindall (LSE:MGNS)
Morgan should be able to survive these tough times due to its £3.7bn order book, solid net cash position (£77m) and benign pension deficit of £3m (in December 2008). And after securing over £800m of new contracts in March alone (£500m with Severn Trent, £100m with the Highways Agency and another £220m redeveloping Blackpool city centre), I estimate the group is well on its way to delivering the bulk of the City’s 2009 targets of £2.4bn sales and 87.3p earnings per share.
Better still, there could be plenty more where this came from later in the year. Morgan Sindall is currently bidding on some massive projects, such as London’s Crossrail and the Thames Tideway, along with chunky tunnelling programmes for both the national grid and London Underground.
The shares look far too cheap, trading on a miserly p/e ratio of 6.6, despite paying a yield of 7.3%. Indeed, as a sign of the board’s confidence, the dividend was hiked 11% in February to 42p a share – a rare feat in these credit-starved times.
Morgan Sindall does face some stiff headwinds, particularly within its struggling ‘fit-out’ and ‘affordable housing’ divisions. But even here the board is bullish, expecting to win market share during the downturn, as well as cutting costs to protect overall profit margins. What’s more, around 75% of the group’s profits come from the public sector – social housing, building schools and hospitals and completing civil engineering work for regulated industries, such as water and energy. Obviously, a crippling depression in Britain is another risk for the share price, as well as the usual dangers related to major contracts, such as order cancellations or deferrals, and asset impairments.
All the same, these fears are more than factored into the shockingly low valuation. The company’s next trading update is scheduled for the Annual General Meeting on 30 April.
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments