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Morgan Sindall is a cheap economic recovery play with momentum
Construction and regeneration specialist Morgan Sindall (MGNS) has significant share price momentum but remains an inexpensive way to play economic recovery boosted by an internally driven increase in profitability and exposure to bumper infrastructure spending.
The shares trade on a 2021 price to earnings ratio of 11.7 and yield 3.4%. That’s still a very reasonable valuation ratio and the dividend yield is much greater than you’d get on cash in the bank.
We are also attracted by the company’s straightforward focus on organic growth, a habit of being conservative with guidance, and the transparency of its numbers with very few if any exceptional items in its published results.
Apart from the fit-out business which has relatively limited visibility, the other parts of the group benefit from long-term contractual relationships which make their revenue streams fairly predictable.
Morgan Sindall’s secured workload increased 5% from £7.9 billion at the end of September 2020 to £8.3 billion by the year end.
The company should be well positioned to take market share coming out of the pandemic as its strong balance sheet – Liberum forecasts a 2021 year-end net cash position of £189 million – separates it from more financially strained rivals. Clients want to know the firm they contract for a project will be around to complete the work.
Morgan Sindall is targeting an improvement in its margins in the Partnership Housing unit – driven by more mixed tenure work (such as developments with owner-occupiers as well as shared ownership and rental properties), increased efficiency in operations and close control of costs.
The company is also targeting an improvement in return on capital employed from an already high margin Urban Regeneration business, from around 14% to 20%.
In November 2020 the Government committed to investing £27 billion in infrastructure and Morgan Sindall looks well placed to take advantage, particularly on the road and rail side of things.
The main risks look to be significant exposure to private sector clients, where contract awards could be lumpy and volatile depending on economic conditions and pressure on the fit-out business thanks to the work from home trend.
However, the track record and a solid management team gives us confidence any risks can be successfully navigated.
Analysts forecast approximately 3.6% revenue growth each year for the next three years. An increase in margins means pre-tax profit growth should be much greater. Pre-tax profit is expected to recover strongly this year to £93 million (2020: £65 million, 2019: £90 million), rising to £102 million in 2022 and £113 million in 2023, according to Refinitiv data. [TS]