Life is tough for construction business Morgan Sindall just now. All of its main business areas are being squeezed as customers spend less money. It specialises in affordable houses and urban-regeneration projects. That’s made it a victim of cuts as the government reduces spending on capital projects. As a result, it issued an austerity-related profits warning back in November. The shares are still 25% off the 52-week high of 725p seen in February last year.
And the company doesn’t expect things to get any easier: 2013 will be tough too. The construction business is fiercely competitive and operates on wafer-thin margins. Demand for affordable housing has been hit by a lack of mortgage availability, while the market in fitting out offices is also lacklustre. This means profits are likely to be lower in 2013 than in 2012.
Unsurprisingly, given the challenges it faces, Morgan Sindall’s shares look quite depressed. But are they cheap? That all depends on whether or not profits can start growing again. The profits warning saw the departure of the previous CEO. The company’s founder, John Morgan, is now back running the company. He has set about turning it around. So what’s his grand plan?
Morgan Sindall (LSE: MGNS)
Firstly, the company is cutting costs. But it is also reshaping its construction business and diversifying away from the public sector. It is doing this by gradually winning business in sectors where customers are spending more money, such as rail, utilities and infrastructure.
On top of this, it is the preferred bidder for a £1bn urban regeneration project in Slough and has increased its investment in ISIS, a company that regenerates waterside locations.
The government-backed NewBuy scheme should also be helpful to its affordable housing business. As a result, I think there’s a good chance that profits could start growing again in 2014.
It’s worth remembering that companies with big, volatile construction businesses rarely attract high stockmarket valuations – and Morgan Sindall is no exception. However, the shares look cheap enough to reward the patient investor. They trade on just eight times 2013 earnings and, better still, offer a hefty dividend yield of 7.7%.
Throw in the fact that Morgan Sindall also has stakes in private finance initiative investments estimated to be worth £56m, or 20% of its market capitalisation, and the business looks attractive at this price.
Verdict: definitely worth a punt