24th Oct 2014 07:58
LONDON (Alliance News) - Morgan Sindall Group PLC shares plummeted in early trade on Friday after the construction company said its full-year results are likely to come in below expectations on the back of problems with contracts in London and the South of England.
Shares in the company were down 12% to 695 pence, comfortably the worst performer in the FTSE All Share index.
The company said that, while it saw a good performance in its Affordable Housing, Urban Regeneration, Fit Out and Infrastructure arms in recent months, its full-year results would be below its previous expectations, issued on August 5, due to construction contracts in London and the South, which have been delayed and for which the company has incurred extra costs in order to complete.
The main problems came in its Construction & Infrastructure division, where the delivery pressures in London and the South impacted overall performance. It said the issues were related to a "small number of fixed-price construction contracts" due to be completed in the next six months. Morgan Sindall said it was forced to use additional resources to complete the contracts. In addition, it incurred further costs due to contractual penalties imposed due to the delay to the projects.
In addition, the company said the construction site for the GBP15.8 million GlaxoSmithKline Carbon Neutral Laboratory of Sustainable Chemistry at the University Of Nottingham was destroyed by a fire.
Due to those problems, the division is now expected to post a full-year performance below expectations, with full year operating profit margins for the Construction & Infrastructure business cut from 1% in 2013 to 0.3-0.5%.
Elsewhere, the group said its Fit Out business traded well and said it expects the full-year result for this business unit to exceed expectations. Its Affordable Housing business has traded in line, but it said some of the projects handled by its Urban Regeneration arm would be delayed to 2015.
Morgan Sindall's order book at September 30 was GBP2.7 billion, down 2% on its half-year position at June 30 but 12% ahead of the start of the year.
"We are obviously disappointed that a small number of construction contracts in London and the South have been impacted by timetable slippage and increased estimated costs to complete. This is a short-term and localised issue which is receiving the highest level of management attention and which should be worked through over the next six months," said Morgan Sindall Chief Executive John Morgan.
"We firmly believe that the medium and long term opportunities and prospects for the group remain very attractive, as demonstrated by the higher quality order book and pipeline," Morgan added.
Morgan Sindall's woes were met with conflicting reactions from analysts, with Jefferies slashing its profit estimates, price target and rating on the stock, but Numis suggested that the company remains good value and well placed to benefit from future construction industry trends.
Jefferies downgraded its full-year pretax profit estimate for Morgan by 21% on the back of the warning, cut its price target to 873 pence, and slashed its rating on the stock to Hold from Buy.
It said it would maintain a negative stance on the stock until a line has been drawn under the problem contracts in London and the South.
Numis took a more forgiving view of the situation, saying it appeared the problems are isolated to its London business and will have no impact on its other construction businesses. In addition, it said a line should indeed be drawn under the issues once the troubled contracts are completed in the next six months.
The broker argues that while the Friday's shares decline was inevitable, the valuation on the company remains attractive and said Morgan Sindall is among the best placed companies in the construction sector based on its view that commercial and affordable housing will be central tenets of an improvement in construction activity in 2015 and beyond.
By Sam Unsted; [email protected]; @SamUAtAlliance
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