Construction and regeneration firm Morgan Sindall (MGNS) posted record profits for the first half of the year, showing further growth on last year which analysts already considered to be a ‘step-change in performance’.

With the office fit-out market accelerating, an elevated order book and strong cash-flow generation, we think the market is undervaluing the group’s shares.

Despite a tough operating environment, where material and labour costs have affected margins on some projects, Morgan Sindall reported record pre-tax earnings for the first six months of 2022 on the back of a solid 9% increase in revenue.

The company also nudged up its full-year guidance, having already upgraded its forecasts in February when chief executive John Morgan described the group as ‘in its best shape ever’.

Its strong balance sheet and substantial net cash position allows the firm to pursue a disciplined approach to contract selection, giving it a secured workload of £8.5 billion of high-quality orders at the end of June.

Construction and infrastructure made up just under half of the £1.7 billion of first-half revenue. The aim is to grow that part of the business to £1 billion of annual revenue with a combined 3%-plus operating margin.

Fit-out revenue jumped 20% in the first six months, accounting for just over a quarter of revenue thanks to a surge in demand as firms revamped their workspaces in order to attract staff back to the office.

Partnership housing and urban regeneration, where the group works alongside housing associations and local authorities, made up the balance of revenue, with an increase in the size of housing projects and healthy growth in margins.

Most of the contracts in this division are long-term with around 60% of secured work only scheduled to commence from 2024 onwards.

It should be noted that on top of the £7 million provision for partnership housing taken under the Developer Pledge to address building safety measures, the Government has requested the firm commit to the pledge as a mixed-used developer which would involve a £40 million to £50 million charge before recoveries.

Margins in the construction business are expected to be around the top end of the company’s range of estimates, while profits in the fit-out division are seen ‘materially ahead’ of the top end of the target range for the full year.

Analysts at Numis see profits growing 40% in the medium term, supported by strong organic momentum and an order book equivalent to 2.5 times revenues.

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