2009 review
Investing for the future
The Investments unit is reported as a separate segment for the first time this year as a result of the disclosure requirements of IFRS 8 'Operating Segments'. The unit's results were previously reported within Group Activities. The unit comprises the Group's project finance activities (predominantly in PFI/PPP) and includes the cost of bidding for investment opportunities as well as the management of existing investments. Its strategy is to target and invest in projects where the Group has expertise and a competitive advantage in terms of construction delivery through one of its operating divisions.
In 2009 Morgan Sindall Investments' revenue was £3m (2008: £1m) and the operating loss was £3.0m (2008: £2.2m). Ongoing operating losses reflect the significant upfront costs of bidding for PPP and PFI projects.
However, the directors' valuation of the investment portfolio gives a clearer indication of the value created within the unit.
Exceptionally successful investment performance
The directors' valuation of the unit's portfolio of investments is £38m (2008: £28m). This valuation represents the value of invested equity and subordinated debt, funding committed and the value created from its investments.
Key achievements in 2009 included the on-time and on-budget completion of an integrated £60m scheme delivering new operational stations and new headquarters for the Dorset fire service and the Dorset police service. In addition the unit achieved financial close on a number of schemes including the Basildon Sporting Village valued at £36m, the Wigan Life Centre valued at £60m, both of which will also be constructed by Morgan Ashurst, and several NHS LIFT schemes totalling £53m.
A year of improved capability
The Group's improved capability to deliver larger and more complex projects, particularly at Morgan Est and Morgan Ashurst, has opened up bidding opportunities for the Investments unit. The appointment as preferred bidder for the Tayside Mental Health Hospital (development value £121m) and the framework for the Hull BSF programme (development value £400m) are landmark examples.
The unit also delivered its first project in partnership with the Fit Out division in 2009, working in Camden on the NHS LIFT programme.
In excess of £700m in development value
The Investments unit currently has interests in development schemes with a gross development value of over £700m. These developments are either operational or in construction and are evenly spread across the division's core sectors of health and social care, emergency services, education, leisure, regeneration and infrastructure. The developments are located across the UK and are being constructed with the Construction, Infrastructure Services or Affordable Housing divisions as the delivery partner.
The unit's long-term aim is to grow the construction revenue of Morgan Sindall by exploiting its funding and operational expertise, with a special focus on public sector projects, with the additional benefit of delivering recurring investment returns.
Outlook
Significant potential in preferred bidder status
The total gross development value of projects where the Investments unit has reached preferred bidder status currently stands at more than £500m. These projects have a high likelihood of being secured. They represent potential income growth for the unit and potential construction revenue for other Morgan Sindall divisions.
Creating long-term value
The Group's enhanced ability to handle larger projects and developments has expanded the market available to the Investments unit in the medium-term. The unit is currently pursuing early stage opportunities in the BSF programme and PFIs in the social housing sector. Whilst any change in Government in 2010 may lead to a review of specific priorities in the short-term, it is expected that the firm demand for PPP/PFI schemes will remain robust in the medium-term.
Directors' valuation approach
At 31 December 2009 the Group had total equity and subordinated invested and committed debt in its portfolio of PPP/PFI concessions of £19.2m (2008: £13.7m). Of this total, £12.1m had been invested and £7.1m is committed to be invested over the next three years. This figure does not include a further investment of around £8.5m of equity and subordinated debt likely to be committed to four schemes at preferred bidder stage or any value attributed to future schemes likely to be awarded under exclusivity agreements.
The Group is reporting for the first time its own valuation of its portfolio. This is based on discounting expected future cash flows but does not include potential refinancing gains or projects at preferred bidder stage or profits made by Investments from providing services or profit made by other parts of the Group that perform the construction, maintenance or facilities management work.
At 31 December 2009 the directors' valuation of the PPP/PFI concession portfolio, prior to the application of Group tax, is £38m (2008: £28m). The valuation is derived from the Group's latest detailed financial models discounted using rates appropriate to the particular scheme’s nature and stage of development. These vary from 7.0% to 9.0% (post tax). Committed, but not currently invested, subordinated debt is added to this discounted cash flow value to give the directors' valuation. Investment properties are valued on a traditional basis using property yields that reflect the nature of the leases and stability of the tenants.
