Infrastructure, affordable housing and urban regeneration group Morgan Sindall (MGNS) is a good example of a UK stock with an attractive growth rate selling at a discount not only to the market but also relative to its own history.
The group’s construction arm is expert in physical infrastructure and complex regeneration projects, while its fit-out division is the UK market leader generating consistent cash flows which support the group’s investment in affordable housing and mixed-use redevelopments.
EXPERIENCE MEANS A DISCIPLINED APPROACH
John Morgan co-founded Morgan Lovell in 1977, which then merged with William Sindall in 1994 to form Morgan Sindall, and still leads the company today with responsibility for the group’s overall strategy.
The rest of the management team is equally experienced with Chris Booth, head of Overbury and the fit-out division, having been with the firm 30 years, company secretary Clare Sheridan having been on board for more than 20 years and most of the rest of the team having served for more than a decade.
The group consists of six specialist divisions across construction and regeneration in the UK public, private and regulated sectors, with the cash flows from the construction business invested in regeneration projects and 73 pence in every pound spent on average going into projects with ‘social value’.
The firm defines its strategy as achieving ‘quality of earnings’ by selecting projects aligned to its strengths, delivering a first-rate service to its customers and end-users, thereby securing long-term workstreams, and continuing to innovate and add value, all the while maintaining a strong balance sheet.
It has a disciplined approach to capital allocation, making sure first of all there is an element of downside protection to the balance sheet should there be an unforeseen macro event, after which it maximises organic returns by investing in regeneration activities and then it considers bolt-on acquisitions to accelerate growth.
Only when all these priorities are satisfied does the board look at returning surplus cash to shareholders, which to us seems eminently sensible when the business itself generates such attractive returns.
SOLID PERFORMANCE IN A TOUGH ENVIRONMENT
In what was widely acknowledged to be a tough year for the construction industry in general, Morgan Sindall posted record results in 2023 with revenue up 14% to £4.1 billion and adjusted pre-tax profit up 6% to £145 million.
As of December, the order book stood at £8.92 billion or more than two years’ worth of work, with management taking a selective approach to bidding and spreading its risk across suppliers and subcontractors.
The group recently published its first-quarter trading update showing an increase in the order book to £9 billion and an average daily net cash position between the start of January and the end of April of £389 million against £281 million last year.
Trading over the quarter was in line with expectations, although fit-out was ‘very strong’ suggesting a significant increase in first-half revenue and partnership housing has seen higher sales thanks to an upturn in the market since the turn of the year.
Against this, urban regeneration saw a lower level of scheme completions and the property services business will book a charge to exit an underperforming contract but the full-year outlook for the group is unchanged.
ARE THE SHARES CHEAP?
Using almost 30 years of historic data, we estimate the firm has grown its earnings by an average of more than 11% per annum, which is better than any of the mainstream construction firms or the housebuilders, and with lower volatility which suggests it is less cyclical.
According to Stockopedia, the shares trade on a 2024 price to earnings multiple of 9.7 times with a yield of 5.1% compared with 12.6 times and 4.2% for the FTSE 250 index, which seems good value for a business with a return on capital of around 20% (FTSE 250 average 7.3%) and a proven track record of growing its earnings at a double-digit rate.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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