The executive chairman of Morgan Sindall is steadfastly confident of the construction group’s strength through hard times
When we meet at John Morgan’s swanky West End offices the 51-year-old executive chairman of the construction group Morgan Sindall (MGNS) is calmly upbeat. When I put it to Morgan that four of the five businesses in which his company operates – fit-out of new offices, social housing, construction and urban re-generation – are suffering badly in the downturn, he is not fazed and instead stresses the company is better placed than its peers.
‘During a downturn the large companies gain market share,’ Morgan shoots back. ‘Balance sheets count. The contracts that are coming out are big frameworks where lots of jobs are wrapped up into one. We have a history of taking market share. In 1989 we had 3% of the fit-out market and in 1994 we came out with 12% – and we’re picking up market share this time too.’
Clearly mindful of the final results due in two weeks (24 February) and not wishing to give away any sensitive trading information, Morgan politely bats back my questions. When I challenge him the stock’s 7.6% yield suggests the market may be pricing in a cut to the final dividend, he will not be drawn but does give something back.
After he rebuts my assertion, saying ‘we have not heard that said and I don’t believe it’ the chairman playfully suggests his shares are too cheap, a claim he returns to later in the interview when discussing the various merits of Morgan Sindall to peers Kier (KIE) and Balfour Beatty (BBY), which are currently trading on earnings multiples twice that of his company.
Tender points
Back to the issue of the oncoming recession – I put it to Morgan tender lists for construction work are crowded places at present. At the very least this will delay the tender process, and the bigger risk is contractors will lose their pricing power. ‘We don’t spend our time on crowded tender lists,’ replies Morgan who is sporting a blue pin-striped shirt and blue tie. ‘When there are six or seven people on a list that is not the place to be. There are generally three to four contracts on the frameworks for our schools business.’
On the issue of prices, he accepts they are falling but adds ‘costs will come off too’. The one part of the business the analysts expect to hold up is infrastructure, which trades as morgan=est. As one of the country’s largest tunnelling civil engineers Morgan Sindall will be in the line-up for the huge Crossrail project, which aims to send a railway line under London west to east. There is also the much talked about government spending on infrastructure, although on this point I put it to Morgan the scale of the UK fiscal spending plans are insufficient to make a significant difference.
Brokers at Numis Securities estimate the recently announced UK spending plans amount to only 5% of annual construction output. It is the US government spending plans that are more likely to make a meaningful difference (Shares 5 Feb ‘09) and Morgan has no overseas exposure. But my subject insists his company can benefit from increased state spending: ‘It will make a big difference to us since we tend to do the big infrastructure projects and it’s the big projects they are pushing forward such as Crossrail, and we are the biggest tunnelling contractor in the UK by a long way.’
Tunnelling away
It has to be remembered infrastructure is only a small portion of Morgan’s overall business. House broker RBS forecasts turnover from morgan=est to be £650 million in the 12 months to 31 December, or 27% of overall sales of £2.4 billion and 19.8% of total forecast operating profit. I therefore suggest investors would be better off investing in Kier, where Numis estimates 40% of turnover in the 12 months to June 2008 came from infrastructure, or Balfour Beatty, which generates the majority of its sales from infrastructure spend, a good slug of which comes from the US.
‘We’re bigger than Kier,’ shoots back Morgan, who questions Numis’s estimates, adding: ‘We’re much better value,’ a point supported by the fact Morgan Sindall currently trades on a price/earnings ratio (PE) of 4.6 times December 2009 forecast earnings versus Balfour’s 9.3 times. The only problem with this argument is we are unlikely to see a catalyst for the share price until next year at the earliest. Construction is a late-cycle business, given its long contract lead times, so as a sector it will be among the last to feel the downturn (bar the Lovell housing business) and, on the flip side, among the last to
recover.
Earnings recovery
I ask Morgan whether construction earnings will not recover until 2011 if the UK economic downturn proves much longer and deeper than many expect. He replies: ‘There will always be some markets [in construction] that do well. Construction throughout the cycle does not go up or down.’ But that looks hard to buy in Morgan’s case. Infrastructure spend may hold up but social housing, construction in general and urban regeneration could remain weak given the state
of the commercial property market.
After making his points about prior cycles’ market share gains the chairman then makes an observation that is perhaps worrying from the perspective of current shareholders. He says because government spending is being brought forward now it could create difficulties in 2011 as spending will have to be cut: ‘If you ask what [we] can do now it is add profit share in 2014 and 2015, I know that may not interest shareholders now.’
I turn to Morgan’s structure, but before I can finish my question as to whether Morgan, made up of several individually branded businesses, could not be considered a conglomerate, he butts in: ‘It is easy to say we are a conglomerate, but in reality we are just clearer about what we do – a lot of companies, for instance, have social housing and construction in the same division. We are not a conglomerate.’
First among equals
Given Morgan has the executive chairman role alongside the chief executive Paul Smith, I ask whether there is not potential for friction between himself and Smith. Surely there can ever only be one person in charge of a company? ‘No, one of our core values is we want to be different. Paul manages the business and I lead the business.’ What does he mean by lead? ‘All the things that managers do Paul does while I spend my time out and about winning customers.’
I ask whether this means Morgan is the rainmaker. He is clearly unhappy when I inform him Shares will run a picture of him in the magazine (‘please don’t’) and this tag causes equal discomfort. There is, however, a clear and firm set of beliefs behind this reaction. ‘We don’t have a business of heroes and we keep a low profile if we possibly can. It is a team that delivers not an individual. My job is to make sure my team has the right opportunities to allow it to succeed.’
