Additional information on the Group's financial performance can be found elsewhere in the annual report and accounts as follows:
- divisional trading performance is covered in note 1 to the consolidated financial statements;
- cash flow is analysed in detail in note 26 to the consolidated financial statements;
- this financial review addresses treasury risks and risk management; the broader risks facing the Group are dealt with under Key risks section; and
- directors' valuation of PPP/PFI investments is included under the Investments review.
Difficult conditions but Construction and Infrastructure Services deliver record results
Where stated, operating profit is profit from operations before amortisation.
Although 2009 has been a difficult year for the economy, Morgan Sindall has delivered strong results in challenging market conditions, which in particular impacted the commercial fit out, regeneration and housing markets and accounted for the declines in revenue and profit. However, within these results are record performances for the Construction and Infrastructure Services divisions which have served to offset declines in Fit Out, Affordable Housing and Urban Regeneration. Since the start of 2008, the Group has acted decisively to address its cost base, resulting in annualised cost savings of £38m. Further action will continue to be taken as necessary.
The principal factors behind the reductions in revenue are falls of £183m (39%) in Fit Out, £70m (9%) in Construction, £29m (4%) in Infrastructure Services and £52m (62%) in Urban Regeneration. Revenue in Affordable Housing has been maintained, largely due to robust demand for refurbishment and new build activities and, the success of its shared equity scheme in supporting open market house sales.
Profit before tax and amortisation has fallen from £71.4m in 2008 (a margin of 2.8%) to £51.5m (2.3%) in 2009. This was due largely to falls in operating profit in Fit Out of £12.0m (47%), in Affordable Housing of £6.1m (29%) and in Urban Regeneration of £7.1m (91%), which have been partly offset by an increase in Construction of £3.5m (37%) to a record £13.0m and Infrastructure Services of £2.7m (19%) to a record £17.1m. Operating margin in Construction and Infrastructure Services was a record, standing at 1.7% (2008: 1.2%) in Construction and 2.2% (2008: 1.8%) in Infrastructure Services. These improvements reflect the Group’s progress in its Perfect Delivery quality programme and proactive management of its cost base, as well as a more mature project profile at Infrastructure Services. Finance income has fallen from £4.3m in 2008 to £1.0m, as a result of lower average cash balances and lower interest rates.
The Investments unit is reported separately for the first time this year and incurred an operating loss of £3.0m (2008: £2.2m).
The Group made a small acquisition of a housing responsive maintenance business in 2009 and, goodwill of £1.1m arose on this transaction. The acquired business is trading as expected.
Tax
The Group's tax charge of £11.8m (2008: £17.5m) represents an effective tax rate of 26.4% (2008: 28.1%). The decrease in the effective tax rate is largely due to the lower UK corporation tax rate of 28.0% (2008: 28.5%) and prior year adjustments of £1.2m (2008: £0.7m). The Group is in discussion with HMRC concerning the corporation tax treatment of the fair value adjustments which arose following the 2007 acquisition of certain businesses and assets from Amec. As a result of these discussions, the Group received £9.5m in provisional corporation tax repayments from HMRC during 2009, and reduced payments by £9.2m which it would otherwise have made to HMRC during the year. No benefit has been recognised in the tax charge in the income statement in respect of this matter, as discussions are at an early stage and the eventual outcome is unclear. Overall, the Group received a net corporation tax repayment of £7.7m during 2009 (2008: net payment of £18.9m).
Earnings per share
Adjusted basic earnings per share before amortisation has fallen by 27% from 127.8p to 93.9p, in line with the 26% fall in profit after tax adjusted for amortisation expense to £39.7m (2008: £53.9m).
Dividend
The Board has declared a second interim dividend of 30.0p payable on 1 April 2010 to shareholders on the register at the close of business on 12 March 2010. This is in place of the final dividend, which for 2008 was also 30.0p. This gives a total dividend for the year of 42.0p (2008: 42.0p). This is covered by adjusted EPS by 2.2 times (2008: 3.0 times). The fall in cover is acceptable in the short-term as the dividend remains covered by operating cashflows.
The Group's long-term policy remains one of increasing the dividend broadly in line with the growth in earnings, aiming to cover the dividend by earnings between two-and-a-half and three times.
Continuing balance sheet strength
Total equity increased to £209.3m (2008: £192.3m). The number of shares in issue at 31 December 2009 was 43.2m (2008: 43.0m).
The increase of 0.2m shares was due to the exercise of options under employee share option schemes.
Group has substantial cash balances
The cash position of the Group at the year end was strong at £118m (2008: £120m). Average cash during 2009 was £31m (2008: £77m), the decline being principally due to the decline in profit and increasing working capital as construction activity has slowed.
The net cash inflow from operating activities was £25.0m (2008: outflow of £65.5m), with operating profit being offset by a higher level of working capital employed in the business. The working capital increase of £31.3m (2008: £115.3m) is as a result of a decrease in inventories of £29.1m, a decrease in receivables of £62.3m and a decrease in payables of £122.7m. Additionally, the Group has £9.0m (2008: £nil) of shared equity receivables relating to open market sales in the Affordable Housing division. There were net payments of £1.1m to acquire subsidiaries (2008: £nil), capital expenditure was £7.5m (2008: £8.4m) and payments to increase interests in joint ventures were £4.2m (2008: £12.4m), all of which reflect ongoing investment in the business. Cash dividends of £2.2m (2008: £nil) were received from joint ventures. After tax payments, dividends and servicing of finance, the net decrease in cash and cash equivalents was £2.6m. It is anticipated that these cash resources will be available for the development of the Group's businesses, either to fund acquisitions or invest in working capital as required.
Banking facilities of £100m committed until 2012
The Group renewed its banking facilities during 2009 and now has £100m of committed facilities available through to mid-2012. The banking facilities are subject to financial covenants, all of which have been met during the year. These committed facilities supplement the cash balances in providing financial security to the Group.
Consistent approach to treasury risk management
The Group has clear treasury policies which set out approved counterparties and determine the maximum period of borrowings and deposits. Deposits are for periods of no longer than three months. The Group has very limited exposure to foreign exchange risk because its operations are based almost entirely in the UK; non-UK suppliers are used only occasionally.
Although the Group does not use derivatives, some of its joint venture businesses use interest rate swaps to hedge floating interest rate exposures and Retail Prices Index swaps to hedge inflation exposure. The Group considers that its exposure to interest rate and inflation movements is appropriately managed. Further information on the Group's use of financial instruments is explained in note 29 to the consolidated financial statements.
Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in this business review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described above. In addition, note 29 to the consolidated financial statements includes the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.
As at 31 December 2009 the Group had net cash of £118m and committed banking facilities of £100m extending until mid-2012.
The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show the Group should be able to operate within the level of its current banking facilities.
The directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the annual financial statements.
