Business review
Construction

2009 review

Improved financial performance in 2009

The Construction division performed strongly during 2009, growing operating profit by 37% to £13.0m (2008: £9.5m) on revenue of £743m (2008: £813m). The division's operating margin for the year rose to 1.7% (2008: 1.2%) as a result of performance improvements from its continuing Perfect Delivery quality programme.

Reputation for superior quality

The division's growing reputation for superior quality is helping it to secure significant volumes of new work, including three replacement schools for Liverpool's Building Schools for the Future (‘BSF') framework worth £37m and a £71m wing assembly facility for Airbus, as well as being appointed preferred bidder for the £200m Hull BSF and the £100m Tayside Mental Health Hospital.

The division is also improving the way it manages its supply chain and is working to enhance the quality and consistency of its delivery with a smaller number of preferred suppliers. This initiative improves the commitment and quality of service from the suppliers. They are in turn rewarded through initiatives such as not holding retention payments.

Education sector remained robust

Over half of Construction's 2009 revenue came from the education sector. This focus has helped insulate the division from weak demand from the private sector. The year also saw the business build on its presence in the healthcare, prisons and defence sectors through key NHS LIFT schemes and projects for the Scottish Prison Service and Defence Estates.

Appropriate management of the cost base

The combination of lower volumes of private sector work and increased competition on costs made market conditions particularly tough in 2009. Construction has responded to these short-term pressures by reducing staff numbers and managing its overheads more tightly which, combined with reductions in some input prices, has enabled the division to achieve an increase in operating margin for the year.

Working closely with other Morgan Sindall companies

The Construction division took advantage of a large number of opportunities to work with its sister divisions during 2009. These included delivery of complex projects such as the new headquarters building for Shire Pharmaceuticals with Fit Out and the refurbishment of Stratford and Paddington stations with Infrastructure Services.

The division is also one of the Investments unit's construction partners on the re-development of 17 schools for the Hull BSF framework and the sole construction partner on the £60m Wigan Life Centre.

Outlook

Secured work for 2010

The division's forward order book at the start of 2010 stood at £532m (2008: £805m), indicating that the tough market conditions are likely to continue during this year. In addition, the division is at preferred bidder stage on a further £324m of projects which have a high likelihood of becoming secured and provide additional visibility on revenue for the year ahead.

The division will continue to actively manage its cost base throughout 2010, alongside its strategic focus on high quality delivery.

The Construction division is well placed to continue to take advantage of cross Group opportunities into 2010 and beyond. This builds on the division's strength in the public sector, particularly in health and education, the latter remaining important due to the opportunities afforded by the BSF programme. Higher potential sectors for the longer-term include rail, airports, prisons and defence where the division has a growing track record and expertise.