Upgrading Britain's ageing infracture is one way the government may try to kick-start growth. And if it does, this builder stands to profit, says Paul Hill.
Chancellor George Osborne will hopefully tell us how he plans to stimulate growth in the next budget on 21 March. My guess is he will focus on infrastructure, housing and job creation, which is where Morgan Sindall, a multi-line British construction firm, comes in.
Of its four divisions, the largest division is infrastructure (38% of profits). The firm is building part of London's Crossrail line and has been appointed preferred bidder (in a joint venture) by National Grid in a five year £500m electricity transmission scheme.
It is also active in office/retail fit outs (22% of profits), affordable housing (33%) and urban regeneration (7%). The latter offers big upside as many local councils invest in amenities. The division is involved in 30 to 40 projects, including city centres in Salford, Doncaster and Wakefield, as well as Manchester and Stockport railway stations.
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There are challenges, not least ongoing margin pressure in its fit-out arm. But this is partly offset by affordable housing; its Lovell brand pushed profits up 15% in 2011 due to the successful integration of collapsed care provider Connaught's social housing business in 2010. New orders, such as a ten-year, £103m deal from Barnet council to refurbish 15,000 houses, also helped. In total, Morgan Sindall has a £3.4bn order book equivalent to 67% of 2012's revenue target.
Morgan Sindall (LSE: MGNS), rated a BUY by Peel Hunt
Analysts are forecasting 2012 sales and underlying earnings per share (EPS) of £2.2bn and 76.6p respectively. That puts the stock on a low p/e ratio of nine, with a 6% yield (1.8 times covered). I rate the shares on a seven-times earnings before interest, tax, and amortisation (EBITA)multiple. Adjusted for average net cash of £23m and £49m inprivate finance initiatives(PFI) stakes, that generates an intrinsic worth of about 850p per share.
Despite the risks of managing long-term contracts and tightening government budgets, Morgan Sindall looks a good bet. Its resilience was demonstrated in 2008/2009 when it maintained the dividend at the height of the credit crisis. The next trading update is set for May and Peel Hunt has a price target of 890p.
Rating: BUY at 650p (market capitalisation £282m)
Paul Hill writes a weekly share-tipping newsletter, Precision Guided Investments. Seewww.moneyweek.com/PGI.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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