Morgan Sindall Group plc ('Morgan Sindall' or the 'Group'), the construction and regeneration group, today announces its Interim Management Statement covering the period 1 July 2012 to 5 November 2012.
Economic conditions have remained difficult during the period, and the UK construction market continues to face challenges including further reductions in public spending, deferred investment decisions and high levels of competition. Against this backdrop, the Board expects underlying trading for this year to be slightly below previous expectations before taking into account a £7m gain from the sale of the Group’s medical property interests in July.
In response to market conditions, the Group continues to be highly selective when bidding for new work and we have taken further steps to reorganise and streamline the Group. In particular we have re-organised our network of offices delivering construction and our affordable housing business, to ensure we balance the right level of resources to current workload. These organisational changes will have a one-off impact this year, estimated at £10m (including £3.5m of property related provisions). This is part of an on-going process that will have delivered £55m of annualised savings over the three-year period to the end of 2012.
Since the half year we have experienced further market deterioration, which has impacted the short-term outlook for the Group into 2013. However the Group’s confidence in the medium-term outlook from 2014 onwards has increased through its success in securing a number of longer-term opportunities in growing sectors of the market.
Construction and Infrastructure
During the period the Construction and Infrastructure division continued to perform in line with our expectations. Construction remains an important, albeit challenging, market for the division and has some interesting opportunities in the pipeline. As we outlined at the half year, we are focused on increasing our exposure to the growth sectors of the infrastructure market, in which we have a strong track record; rail, aviation, energy and highways. In line with this strategy, we are delighted to have secured a number of key infrastructure opportunities in the second half of the year. In the energy sector we have been selected by Sellafield Ltd as preferred delivery partner, in joint venture, for a potential £1.1bn contract to provide a range of essential infrastructure asset services to the Sellafield site. The business continues to win work in rail and in aviation. Major projects have been secured under existing frameworks at both Gatwick and Heathrow airports including a £31m contract at Heathrow Airport to repair and replace the existing wearing course on the northern and southern runways.
Affordable Housing's response maintenance market remains robust with the division securing £115m of opportunities in the second half of the year. As expected, the new-build social housing market has been hit particularly hard this year as funding issues persist, with the number of new projects falling significantly on the previous year despite funding being committed for 2012-15. Looking ahead we do expect the pipeline of new-build opportunities to improve despite this short-term slowdown in the market as the committed level of funding is spent. Conditions in open market housing continue to be impacted by mortgage availability albeit house sales volumes and values have been reasonably steady during this year.
Despite challenging market conditions, this division's full service offering – through design, construction and life-cycle maintenance - leaves it well placed to target mixed tenure, new-build social housing and maintenance opportunities and as well as major housing-led regeneration schemes.
Fit Out’s market continues to be characterised by a healthy pipeline of refurbishment opportunities coupled with a lack of major fit out opportunities of greater than £20m in value. Overall there has been no major change in the outlook for Fit Out as the market has remained broadly flat in the second half of the year and we expect the division to face similar market conditions into next year.
Overall investor and tenant sentiment remains at a stable but subdued level. However, the division continues to progress a number of major schemes to bring about the vital regeneration of some of the UK’s major towns and cities. In the period the division commenced construction at Blackpool and completed construction on the first phases of developments at Canning Town and Doncaster. In addition the development agreement has been signed for a major office-led scheme at Stockport and consequently the Group’s development pipeline has strengthened by £0.2bn to £2.1bn underpinning our confidence in the medium- term outlook for regeneration.
Since the half year, Investments was appointed preferred development partner for the £1.0bn, 15-year Slough regeneration, which is the second Local Asset Backed Vehicle (LABV) scheme it has won to add to the Bournemouth LABV secured earlier this year. The LABV will procure works from two other divisions within the Group over the lifetime of the joint venture, namely the Affordable Housing and Construction and Infrastructure divisions.
In July the division also sold for £24m its interest in its NHS Lift and medical properties portfolio. The disposal is in line with the Group’s strategy of realising investments as they mature on completion of construction in order to recycle capital into new projects.
We have also today announced a number of changes to the composition of the Board. Please refer to the separate announcement for further details.
As a business we maintain tight control of costs and cash, and ensure that the business is adequately structured and resourced for the current environment. As we navigate the challenging conditions in the UK construction market we have made the decision to reorganise our construction business to focus delivery from regional hub offices. As a result a number of smaller offices are being closed. We have also made changes to the regional structure delivering affordable housing during the period to improve operational efficiency and to align its capability to the increasing number of regeneration opportunities. Overall this restructuring and Board change will result in one-off costs this year estimated at £10m (including £3.5m in property related provisions).
Overall we continue to target major project and framework opportunities across the Group's market sectors. Our future visibility remains steady with the forward order book currently standing at £3.0bn with a further £0.7bn of projects at preferred bidder stage (compared with £3.4bn order book and £0.3bn of projects at preferred bidder stage at the start of 2012). In addition, in line with our strategy to increase our focus on regeneration, the regeneration pipeline has strengthened significantly to £2.1bn with a further £1.1bn of major schemes at preferred bidder stage (compared with a £1.8bn pipeline and £0.6bn of schemes at preferred developer stage at the start of 2012). Average net debt for the year to date was, as expected, consistent with that achieved for the first half of the year.
In summary, our underlying trading for the current year is expected to be slightly below the Board’s previous expectations although the Group will benefit from the £7m gain made on the sale of our medical property investments this year. This gain will in part offset the £10m restructuring charge that will be incurred this year. Whilst we are cautious over the outlook for the Group in 2013, the medium-term prospects for the Group are improving with our increasing emphasis on regeneration, infrastructure and major long-term frameworks.
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Morgan Sindall Group plc Tel: 020 7307 9200
John Morgan, Chief Executive
David Mulligan, Finance Director
Brunswick Tel: 0207 404 5959
Notes to Editors:
Morgan Sindall Group plc is a leading UK construction and regeneration group operating through five divisions of construction and infrastructure, affordable housing, fit out, urban regeneration and investments.