Preliminary results for the y

RNS Number : 5150H

Morgan Sindall PLC

23 February 2010

 



MORGAN SINDALL plc

('Morgan Sindall' or 'the Group')

Preliminary results for the year ended 31 December 2009

Morgan Sindall plc, the construction and regeneration Group, today announces its preliminary results for the year ended 31 December 2009

	2009	2008
Revenue	£2,214m	£2,548m	-13%
Profit before tax and amortisation	£51.5m	£71.4m	-28%
Profit before tax	£44.7m	£62.3m	-28%
Year end cash balance	£118m	£120m	-2%
Adjusted earnings per share1	93.9p	127.8p	-27%
Basic earnings per share	77.9p	106.3p	-27%
Total dividend per share	42.0p	42.0p	No change

¹ Basic earnings per share before amortisation of intangible assets

Group Highlights

·      Robust performance in challenging market conditions

·      Continue to focus on working capital management, cost reduction and supply chain improvements; realised annualised savings of £38m over the past two years

·      Construction and Infrastructure Services divisions delivered record results with improved margin performance

·      Group benefiting from enhanced construction capability and its capacity to take on larger, more complex projects

·      Group remains financially strong with year end cash of £118m and £100m of committed facilities in place through to mid-2012

·      Maintained total dividend

·      Forward order book at £3.2bn (2008: £3.7bn); in addition over £0.9bn (2008: £nil) of projects at preferred bidder stage

·      Well placed, with resources available, to capitalise on opportunities presented by the market

Divisional Highlights

* Divisional operating profits are profit from operations before amortisation of intangible assets.

Fit Out

·      Operating profit* of £13.8m (2008: £25.8m) on revenue of £291m (2008: £474m)

·      Strong performance given the market conditions with margin at 4.7% (2008: 5.4%)

·      Division focused on securing profitable work and performed well to maintain market-leading position

·      Order book up 38% to £171m compared with £124m at start of 2009

·      Value of larger project tenders expected to increase by around a third in 2010

Construction

·      Record operating profit*, up 37% to £13.0m (2008: £9.5m) on revenue of £743m (2008: £813m) underpinned by public sector spending

·      Improved margin performance of 1.7% (2008: 1.2%) achieved through impact of Perfect Delivery quality programme

·      Enhanced capability to deliver larger, more complex projects

·      Order book of £532m (2008: £805m) complemented by over £300m of projects at preferred bidder stage

Infrastructure Services

·      Record operating profit*, up 19% to £17.1m (2008: £14.4m) on revenue of £770m (2008: £799m)

·      Market remained healthy driven by investment in public and regulated infrastructure

·      Margin improved to 2.2% (2008: 1.8%) resulting from more mature project profile

·      Further development of JV partner reputation and increased collaboration with Construction division

·      Order book at £1.1bn (2008: £1.4bn) with a further £0.6bn at preferred bidder stage

·      Medium-term outlook positive, driven by investment in utilities, energy and transport infrastructure

Affordable Housing

·      Robust performance with revenue maintained at £374m (2008: £377m)

·      Operating profit* of £14.9m (2008: £21.0m) and margin of 4.0% (2008: 5.6%) affected by open market housing downturn

·      Change in work mix with increased focus on social new build and refurbishment work to offset weakened open market housing demand

·      Responsive and planned maintenance contracts increasingly bundled; acquisition of a responsive maintenance business further extends its service offering

·      Order book maintained at £1.3bn (2008: £1.3bn)

·      Outlook positive; social housing remains Government priority, open market sector improving and next round of social housing PFIs announced 

Urban Regeneration

·      Solid performance in subdued market conditions; occupier demand remaining weak

·      Operating profit* of £0.7m (2008: £7.8m) on revenue of £32m (2008: £84m)

·      £520m of new development schemes secured during the year

·      Focus remains on public sector and grant-funded opportunities

·      Development pipeline at £1.4bn (2008: £1.3bn); provides confidence on the medium-term outlook

Investments

·      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 

·      £19m invested to date in schemes with development value exceeding £700m

·      Directors' valuation of investment portfolio £38m (2008: £28m)

·      Financial close achieved on schemes valued at £149m during 2009

·      Preferred bidder on £500m (development value) of further projects

Outlook

·      Markets will remain challenging in 2010

·      Signs of recovery in demand for open market housing and demand for fit out from the financial services sector

·      Forward order book at £3.2bn (2008: £3.7bn); in addition over £0.9bn (2008: £nil) of projects at preferred bidder stage

·      Strength of our order book and projects progressed to preferred bidder stage should help to offset some of the effect of weakening public spending demand

·      Urban Regeneration's forward development pipeline valued at £1.4bn (2008: £1.3bn)

·      Well placed to capitalise on the opportunities presented by our chosen sectors

 John Morgan, Executive Chairman, commented:

"These results reflect a very satisfactory performance in difficult trading conditions. We remain in a strong financial position and are well placed to take advantage of the opportunities which the market will present.

"The markets in 2010 will be similar to those we experienced in 2009 but we remain confident of making good progress throughout the year."

ENQUIRIES:
Morgan Sindall plc	Tel: [phone]
John Morgan, Executive Chairman
Paul Smith, Chief Executive
David Mulligan, Finance Director
Blythe Weigh Communications	Tel: [phone]
Tim Blythe	Mobile: [phone]
Paul Weigh	Mobile: [phone]

 

Morgan Sindall will hold its preliminary results presentation for analysts and institutional investors at 9.30am on 23 February at Kent House, 14-17 Market Place, London W1W 8AJ.

 

A copy of the presentation and an audio webcast will be available from 12.00am at www.morgansindall.com/investors.

 

 

Chairman and chief executive's statement

We delivered a robust performance for 2009, despite experiencing some challenging trading conditions across our chosen sectors. The 13% decrease in revenue to £2,214m (2008: £2,548m) and the 28% decrease in profit before tax and amortisation to £51.5m (2008: £71.4m) were principally due to a decline in higher margin activities in the Fit Out and Affordable Housing divisions, although this was partly offset by record results from our Construction and Infrastructure Services divisions. 

Earnings per share before amortisation of intangible assets fell by 27% to 93.9p (2008: 127.8p). Profit before tax (after amortisation of intangible assets) fell by 28% to £44.7m (2008: £62.3m). We have declared a second interim dividend of 30.0p payable on 1 April 2010. This is in place of the final dividend, which for 2008 was 30.0p and was paid on 8 May 2009. This gives a total dividend for the year of 42.0p (2008: 42.0p). 

Our year-end cash balance was £118m (2008: £120m) and we achieved, as expected, an average cash balance throughout the year of £31m (2008: £77m). This lower level of average cash reflects the higher levels of working capital required as construction activity has slowed. The Group's financial position remains strong which, combined with our debt facilities of £100m available through to mid-2012, leaves us well placed to take advantage of opportunities presented by our markets.

Long-term strategy supported by emphasis on robust financial disciplines

Our long-term strategy continues to be the achievement of leading positions in all our chosen markets. Delivering a quality construction service in close collaboration with our clients is a key component in achieving this aim.

In 2009 the Fit Out division experienced a considerable contraction in the commercial office sector, resulting in reductions in revenue and operating profit*. In challenging market conditions the division remained focused on securing profitable opportunities rather than securing revenue at any cost and it is our view that the division performed well in maintaining its market leading position and healthy operating profit* margins.

The Construction and Infrastructure Services divisions both delivered record results, increasing operating profit* and margin in 2009, based largely on the strength of their positions in the public and regulated sectors, combined with an increased capability to take on larger and more complex projects. The Construction division also benefited from further improvements resulting from its continuing Perfect Delivery quality programme.

The Affordable Housing division maintained its revenue and generated an excellent operating profit* during the year given the difficult market conditions for open market housing. This was due to strong new-build contracting and refurbishment demand for social housing which helped to counteract reductions in profitability from sales of open market housing.

The Urban Regeneration division delivered a satisfactory performance in 2009 and contributed a small profit in a very subdued market, aided in some part by the recovery in sales of open market housing. The business remains ideally positioned to take advantage of future opportunities as occupier demand recovers.

The Investments unit secured a number of new projects during the year and is currently at preferred bidder stage on several high value schemes. The directors' valuation of the investment portfolio held by the division increased during the year to £38m (2008: £28m).

We report more fully on each division in the divisional review that follows this statement.

Since the beginning of 2008 we have realised annualised savings of £38m and we continue to focus on working capital management, cost reduction and supply chain improvements, as well as responding to market growth opportunities where they present themselves.

Changes to the Board

We welcomed Patrick De Smedt to the Board as a non-executive director in December 2009. In addition, we are pleased to announce that Simon Gulliford will join the Board as a non-executive director on 1 March 2010. Simon has particular experience in the area of strategic marketing both as a consultant and in an executive capacity. He set up his own marketing consultancy in 1992, after leaving Ashridge College where he was head of the marketing faculty. Since that time he has had a number of marketing roles for companies including Sears plc, EMAP plc and, until 2001, group marketing director of Barclays plc. His non-executive directorships have included St James's Place plc from 2005 to 2008 and Business Control Solutions Group plc from 2005 to 2009.  He is currently chief marketing officer at Standard Life plc.

Patrick and Simon's experience will further enhance the range of skills and abilities our non-executive directors bring to the Board.

Jon Walden will leave the Board at the forthcoming annual general meeting after nine years as a non-executive director; we thank him for his valuable contribution during his time with the Group.

 

Outlook - opportunities are presented in continued challenging markets

Whilst we expect that our markets will remain challenging in 2010, as many of them continue to be impacted by the effects of the economic downturn, we are seeing some signs of recovery in demand for open market housing and demand for fit out from the financial services sector. This, combined with the strength of our order book and projects progressed to preferred bidder stage, should help to offset some of the effect of the expected further weakening of public sector spending. We have taken positive and timely action as overall construction activity has slowed and we will continue to take the necessary steps to shape our business as the market changes.

 

At the same time, however, we will continue to assess all new market opportunities that arise and use our track record, expertise and operational and financial strength to exploit them where appropriate.

Fit Out is well positioned to respond to signs of improved demand for major projects in the commercial office market, especially demand from the financial services sector, and will focus on growing its share of the retail banking, hotel and education sectors. 

Construction's focus on sectors with growth potential such as prisons, airports, defence and rail and its capability to deliver larger projects will help counter the effects of a subdued commercial market and any future public sector spending reductions.

Infrastructure Services' medium and longer-term growth potential in the energy and transport sectors, driven by investment in key infrastructure projects, will complement the division's strong presence in the utilities market. 

Affordable Housing will focus on exploiting the improving open market housing sector and on the latest round of social housing PFI opportunities as well as growing its new response maintenance offering alongside its existing refurbishment expertise.

Having secured substantial regeneration projects in the past few years, Urban Regeneration will continue to progress each of its current schemes, although we expect its market to remain subdued in the short-term. With its quality portfolio the division retains an excellent platform for growth as occupier demand returns in the medium-term.

The Investments unit has a healthy pipeline of PPP/PFI schemes to pursue alongside the five operating divisions. In addition to the construction revenue to be created for the other divisions, these schemes are expected to increase the unit's long-term investment income.

Our forward order book at the start of 2010 stood at £3.2bn (2008: £3.7bn). We also started 2010 with over £0.9bn (2008: £nil) of projects at preferred bidder stage. This element of potential work was created entirely during 2009 and reflects our capability to deliver larger and more complex schemes. In addition, Urban Regeneration's forward development pipeline (its share of regeneration projects in which it has an interest) was valued at £1.4bn (2008: £1.3bn).

The Group produced a robust performance in 2009 against a backdrop of challenging trading conditions. Although we face similar conditions in 2010, our breadth of capability gives us confidence that we are well placed to capitalise on the opportunities presented by our markets.

John Morgan                              Paul Smith

Executive Chairman                   Chief Executive             

23 February 2010          

Divisional performance

The performance of each of the operating divisions for the year ended 31 December 2009 is set out below. 

FIT OUT

Sound financial performance

In 2009 the Fit Out division delivered a strong performance given the challenging market and generated revenue of £291m (2008: £474m) and operating profit* of £13.8m (2008: £25.8m). Margins held up strongly for the year at 4.7% (2008: 5.4%).

Tough market conditions

Contract volumes in both the commercial office and hotel sectors reduced significantly during 2009. This combined with downward pressure on tender prices made it much more difficult to maintain margins. However, the division remained focused on securing profitable opportunities and tight cost control and it is our view that the division performed well in maintaining its market leading position and healthy operating profit* margins.

Regional markets and smaller projects held up well

More resilient market conditions outside London led to a proportional increase in regional revenue to 32% (2008: 22%). Fit Out's longer-term strategic aim is to generate 50% of its revenue from regional clients. The mainstay of the business continues to be smaller projects of under £1m in value and revenue levels in this market have remained broadly consistent during 2009.

Key growth sectors remain active

In contrast with the commercial sector, healthy activity in the public sector office and educational market during 2009 helped to insulate Fit Out's overall performance. The division also increased its share of the retail banking market. These markets are showing some signs of improving demand in 2010, albeit they remain highly competitive, and Fit Out is well placed to take advantage of opportunities as they arise.

Fewer major projects have an impact on revenue

During 2009 the market for larger projects (those valued at greater than £5m) reduced by around 40%. This sector had accounted for around half of the division's revenue in 2008 so the fall in demand impacted heavily in 2009. Tendering activity in this segment is expected to increase in value by around a third in 2010 from 2009 levels. As Fit Out is recognised as a market leader for delivering these large projects it is in a strong position to capitalise on this growth in opportunities.

Differentiation through quality remains a key aim

Delivering leading margins over the long-term will depend on the division's ability to provide its clients with a superior service. It therefore continues to invest in industry-leading approaches to safety, sustainability and staff development. This includes the continued commitment to Perfect Delivery and providing an excellent client experience.

2010 will continue to be challenging

An improvement in tender volumes towards the end of 2009 supports the view that demand in the UK fit out and refurbishment market has improved in the short-term. However, a meaningful recovery in the market or in tender prices is likely to be slow to emerge.

The division continues to look for growth in more stable markets and will therefore be targeting the retail banking, education and public sector occupier sectors in 2010. 

Secured work for 2010

The division started 2010 with an order book at £171m (2008: £124m). This supports its belief that demand in 2010 will improve on 2009 although the market remains highly competitive and price sensitive.

CONSTRUCTION

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 incentives 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. 

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.

INFRASTRUCTURE SERVICES

Improved financial performance 

The Infrastructure Services division continued to perform strongly during 2009, achieving revenue of £770m (2008: £799m) and increasing operating profit* by 19% to £17.1m (2008: £14.4m). The increase in operating margin to 2.2% (2008: 1.8%) resulted from an improved mix of more profitable contracts as a result of better contract selection within the division.

Key sector wins continue 

Although the division saw reductions in new orders and significant price competition during 2009, it responded well and continued to secure high-profile frameworks and projects in its core sectors of water, energy and transport. These significant wins included the £250m Severn Trent AMP5 phase of water treatment upgrades, a further £35m of project work at Heathrow Airport and the upgrade to the A1 from Dishforth to Barton in North Yorkshire (division's share valued at £105m). Following the year end the division also achieved financial close on the £417m Lee Tunnel project for Thames Water, with its share of the project valued at £209m.  In the energy sector the division was successful with the award of preferred partner to deliver the £500m, 10-year infrastructure alliance with E.ON Central Networks.

Progress with major projects

Infrastructure Services made significant progress on the £445m joint venture for the M74 Completion Project, currently Scotland's largest infrastructure scheme, as well as continuing to advance the £336m improvement scheme in joint venture on the M1. The division also built on its reputation as a leading joint venture partner, being successful on Network Rail's multi-asset enhancement framework and positioning itself to bid for major project opportunities including Crossrail and the second Forth Crossing in Scotland. It also worked alongside Morgan Ashurst on a comprehensive refurbishment of Paddington rail station and the infrastructure enabling works for the RAF Valley project in Anglesey.

High quality integrated services

Infrastructure Services' vision is to build a sustainable competitive advantage through providing a high-quality integrated service. In 2009 the division enhanced its integrated service offering by extending its mechanical and electrical service on tunnelling projects such as the Croydon cable tunnel and Belfast Sewerage Project.  In addition, the launch of the Perfect Delivery quality programme will help it to further differentiate itself by focusing on exceptional delivery across all its operations.

Secured work for 2010

The division's forward order book at the start of the year stood at £1.1bn (2008: £1.4bn). In addition the division is at preferred bidder stage on a further £0.6bn of contracts. The delay in commencement of key projects combined with new regulatory periods in the water and electric sectors will see revenue fall in 2010, but it is expected to recover in 2011 and beyond. The division has been more selective in its approach to the latest cycle of bidding in the utilities sector, with a particular focus on its gas and electric expertise as well as longer-cycle frameworks in the water sector. It also continues to bid for significant opportunities in civil engineering and tunnelling projects where it holds a market leading position.

Well placed for long-term growth

The infrastructure market offers the division significant growth opportunities in the medium and long-term in its target sectors of transport, energy and water. For example, the Government's determination to improve the country's infrastructure and to make the UK a low carbon economy is likely to drive significant investment in projects such as Crossrail and in programmes for managed motorways,  power generation, waste and renewable projects and the electrification of the rail network. Infrastructure Services' integrated service offering and depth of engineering expertise place it in an excellent position to capitalise on these opportunities.

AFFORDABLE HOUSING

Robust financial performance

The Affordable Housing division performed robustly during 2009, maintaining revenue at £374m (2008: £377m) and achieving an operating profit* of £14.9m (2008: £21.0m). Margin fell to 4.0% (2008: 5.6%) due to a higher volume of lower margin new build and refurbishment work undertaken to offset lower levels of volume and profitability from the open market housing sector.

Residential sales recovery 

Residential property prices stabilised during the second half of 2009 and this led to a tentative recovery in open market sales of affordable homes. Although the availability of mortgage finance remains tight, the division increased the number of open market house sales by around 50% in 2009 compared with the previous year, albeit at lower average sales prices, largely due to the success of the shared equity scheme launched by Lovell in 2008.

PFI success offers market opportunities

Affordable Housing's first major PFI scheme, the £230m Miles Platting Neighbourhood Project in Manchester, performed strongly during 2009. The refurbishment contract began in 2007 and is due to run until 2011, covering houses, flats and seven multi-storey blocks. The high levels of customer satisfaction and operational performance being achieved on this project provides the division with an excellent platform for the next wave of PFI projects coming to market in 2010 and beyond.

Strategic developments to extend service offer

Clients are increasingly bringing responsive and planned maintenance into a single contract.  In early 2009 the division acquired BMS, a responsive maintenance business, which has been re-branded as Lovell Respond. This has allowed the division to offer a responsive maintenance service to its public sector clients and further extends its service offering.

Strong cash management principles

The Affordable Housing division responded to the challenging trading conditions by strengthening its working capital management and taking tighter control of overheads. Increased open market sales and a higher volume of contracting business enabled the division to trade positively in 2009 and reduce the level of work in progress. Having a strong balance sheet, along with relevant expertise and an established track record, are key elements in securing mixed tenure opportunities as the market recovers.

Well placed to deliver long-term growth

The division will benefit from the recent improvements in the housing market and house prices, as its expertise in mixed tenure regeneration means it is well positioned to take advantage of regeneration opportunities. The refurbishment market will continue as the Government's Decent Homes programme extends well beyond the original 2010 target date. New build affordable housing remains a priority for any future Government. Through its strong relationship with the Homes and Communities Agency the division is well placed to benefit from further Government funding that becomes available.   

Secured work for 2010 and beyond

The division's forward order book at the start of 2010 was maintained at £1.3bn (2008: £1.3bn).

URBAN REGENERATION

On target performance in subdued conditions

Despite tough trading conditions, Muse Developments delivered a satisfactory performance in 2009 and achieved an operating profit* of £0.7m (2008: £7.8m), on revenue of £32m (2008: £84m). 

£520m of new development projects secured 

The Urban Regeneration division secured over £520m of long-term development partnerships during 2009. These included a £300m project to regenerate Doncaster town centre, the initial phase creating Doncaster's first public square, a world-class performance venue and council offices. Future phases include a library and art showcase area, leisure facilities, office developments, housing and car parking.

The division also signed a £220m redevelopment agreement with Blackpool Council. This includes high-quality offices, modern town centre parking facilities and a public transport interchange. The plan also allows for the possibility of replacement law courts, divisional police headquarter buildings, a health centre and a new library.

Muse Developments is currently involved in the master planning, design or construction phases of 24 major schemes.

Residential success returns with a rising market

Construction of three significant residential phases of mixed use schemes was completed during 2009. These projects at Reading, Plymouth and Leeds released 460 units onto the open market, of which 60% were sold by the year-end. The tentative recovery in the housing market gives the division increased confidence in future residential development phases.

Innovative approach to regeneration

The Urban Regeneration division has a highly experienced team, which applies an innovative approach to regeneration thereby developing the best possible solutions for its commercial and public sector partners across the UK. A combination of lasting relationships, commercial performance and consistent quality gives it a solid base for future success. The division is always looking for fresh ways to exploit new opportunities even in difficult market conditions.

Similar trading landscape in 2010

A recovery in the development market will be driven by a revival in occupier demand. Although conditions are expected to remain subdued for the next 12 months, the division is in a strong position to capitalise on the return to growth that should follow. In the medium-term occupier demand is expected to recover, which will help to increase returns from the capital invested in its high-quality development portfolio.

Secured pipeline for 2010 and beyond

The division's future development pipeline at the start of the year stood at £1.4bn (2008: £1.3bn). This pipeline represents the total capital value of the secured development portfolio and will be realised over the next five to ten years. This level of secured workflow gives the division confidence on its outlook for the medium-term.

INVESTMENTS

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 new 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.

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 debt invested and committed 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). This 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 the 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.

Financial review

Robust 2009 performance

	2009	2008	2007
Revenue	£2,214m	£2,548m	£2,115m
Profit before tax and amortisation	£51.5m	£71.4m	£62.1m
Profit before tax	£44.7m	£62.3m	£57.6m
Year end cash balance	£118m	£120m	£219m

Difficult conditions but Construction and Infrastructure Services deliver record results

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 year end 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.

Related party transactions

Related party transactions are disclosed in note 9 following this statement.

Key risks

Key risks are disclosed in note 11 following this statement.

Consolidated income statement (audited)

For the year ended 31 December 2009

		Notes	2009		2008
			£m		£m
Continuing operations
Revenue		4	2,213.5		2,548.1
Cost of sales			(1,993.0)		(2,297.8)
Gross profit			220.5		250.3
Amortisation of intangible assets		4	(6.8)		(9.1)
Other administrative expenses			(170.1)		(185.8)
Total administrative expenses			(176.9)		(194.9)
Share of net profit of equity accounted joint ventures		4	0.1		2.6
Profit from operations			43.7		58.0
Finance income			3.3		9.4
Finance expenses			(2.3)		(5.1)
Net finance income			1.0		4.3
Profit before income tax expense		4	44.7		62.3
Income tax expense		5	(11.8)		(17.5)
Profit for the year attributable to equity holders of the parent company			32.9		44.8
Attributable to:
Owners of the Company			33.0		44.8
Minority interests			(0.1)		-
			32.9		44.8
Earnings per share
From continuing operations
Basic		7	77.9p		106.3p
Diluted		7	77.1p		105.1p

Consolidated statement of comprehensive income (audited)

For the year ended 31 December 2009

			2009		2008
			£m		£m
Profit for the year			32.9		44.8
Other comprehensive income/(expense):
Actuarial losses arising on defined benefit obligation			(0.6)		(0.2)
Movement on cash flow hedges in equity accounted joint ventures			0.6		(0.1)
Other comprehensive income/(expense) for the year, net of income tax			-		(0.3)
Total comprehensive income for the year attributable to equity holders of the parent company			32.9		44.5
Attributable to:
Owners of the Company			33.0		44.5
Minority interests			(0.1)		-
			32.9		44.5

 

Consolidated balance sheet (audited)

At 31 December 2009

			2009		2008
			£m		£m
Non-current assets
Goodwill			184.4		183.3
Other intangible assets			16.6		23.4
Property, plant and equipment			31.3		32.7
Investment property			1.8		-
Investments in equity accounted joint ventures			50.2		53.0
Investments			0.1		0.1
Shared equity loan receivables			9.0		-
Deferred tax assets			3.8		2.7
			297.2		295.2
Current assets
Inventories			141.2		171.3
Amounts due from construction contract customers			179.7		189.2
Trade and other receivables			155.1		209.0
Cash and cash equivalents			117.7		120.3
			593.7		689.8
Total assets			890.9		985.0
Current liabilities
Trade and other payables			(576.3)		(675.2)
Amounts received in advance on construction contracts			(49.0)		(78.3)
Current tax liabilities			(27.3)		(8.5)
Finance lease liabilities			(1.8)		(1.9)
			(654.4)		(763.9)
Net current liabilities			(60.7)		(74.1)
Non-current liabilities
Trade and other payables			(0.1)		(0.1)
Provisions			(16.8)		(18.3)
Retirement benefit obligation			(3.2)		(3.0)
Finance lease liabilities			(7.1)		(7.4)
			(27.2)		(28.8)
Total liabilities			(681.6)		(792.7)
Net assets			209.3		192.3
Equity
Share capital			2.2		2.2
Share premium account			26.7		26.6
Capital redemption reserve			0.6		0.6
Own shares			(6.0)		(6.4)
Hedging reserve			(1.7)		(2.3)
Retained earnings			187.6		171.6
Equity attributable to owners of the Company			209.4		192.3
Minority interest			(0.1)		-
Total equity			209.3		192.3

 

 

Consolidated cash flow statement (audited)

For the year ended 31 December 2009

	Notes		2009		2008
			£m		£m
Net cash inflow/(outflow) from operating activities	8		25.0		(65.5)
Cash flows from investing activities
Interest received			3.4		9.2
Dividend from joint ventures			2.2		-
Proceeds on disposal of property, plant and equipment			1.0		0.8
Purchases of property, plant and equipment			(7.5)		(8.4)
Payments to acquire interests in joint ventures			(4.2)		(12.4)
Payment for the acquisition of a subsidiary			(1.1)		-
Net cash outflow from investing activities			(6.2)		(10.8)
Cash flows from financing activities
Payments to acquire own shares			(0.1)		(0.9)
Dividends paid	6		(17.7)		(16.9)
Repayments of obligations under finance leases			(3.7)		(4.9)
Proceeds on issue of share capital			0.1		0.4
Net cash outflow from financing activities			(21.4)		(22.3)
Net decrease in cash and cash equivalents			(2.6)		(98.6)
Cash and cash equivalents at the beginning of the year			120.3		218.9
Cash and cash equivalents at the end of the year
Bank balances and cash			117.7		120.3

 

Consolidated statement of changes in equity (audited)

For year ended 31 December 2009

	Attributable to the Company
	Share capital		Share premium account		Capital redemption reserve		Reserve for own shares held		Cash flow hedging reserve		Retained earnings		Total		Minority interests		Total equity
	£m		£m		£m		£m		£m		£m		£m		£m		£m
Balance at 1 January 2008	2.1		26.3		0.6		(5.5)		(2.2)		144.4		165.7		-		165.7
Total comprehensive income for the year:
Net profit	-		-		-		-		-		44.8		44.8		-		44.8
Other comprehensive income:
Actuarial losses arising on defined benefit obligation	-		-		-		-		-		(0.2)		(0.2)		-		(0.2)
Movement on cash flow hedges in equity accounted joint ventures	-		-		-		-		(0.1)		-		(0.1)		-		(0.1)
Total comprehensive income for the year, net of income tax	-		-		-		-		(0.1)		44.6		44.5		-		44.5
Share-based payments	-		-		-		-		-		2.3		2.3		-		2.3
Issue of shares at a premium	-		0.3		-		-		-		-		0.3		-		0.3
Exercise of share options	0.1		-		-		1.9		-		(1.9)		0.1		-		0.1
Movement on deferred tax asset on share-based payments	-		-		-		-		-		(0.8)		(0.8)		-		(0.8)
Own shares acquired in the year	-		-		-		(2.8)		-		-		(2.8)		-		(2.8)
Dividends paid:
Final dividend for 2007	-		-		-		-		-		(11.9)		(11.9)		-		(11.9)
Interim dividend for 2008	-		-		-		-		-		(5.1)		(5.1)		-		(5.1)
Balance at 31 December 2008	2.2		26.6		0.6		(6.4)		(2.3)		171.6		192.3		-		192.3
Balance at 1 January 2009	2.2		26.6		0.6		(6.4)		(2.3)		171.6		192.3		-		192.3

Consolidated statement of changes in equity (audited) (continued)

For year ended 31 December 2009

	Attributable to the Company
	Share capital		Share premium account		Capital redemption reserve		Reserve for own shares held		Cash flow hedging reserve		Retained earnings		Total		Minority interests		Total equity
	£m		£m		£m		£m		£m		£m		£m		£m		£m
Total comprehensive income for the year:
Net profit	-		-		-		-		-		33.0		33.0		(0.1)		32.9
Other comprehensive income:
Actuarial losses arising on defined benefit obligation	-		-		-		-		-		(0.6)		(0.6)		-		(0.6)
Movement on cash flow hedges in equity accounted joint ventures	-		-		-		-		0.6		-		0.6		-		0.6
Total comprehensive income for the year, net of income tax	-		-		-		-		0.6		32.4		33.0		-		32.9
Share-based payments	-		-		-		-		-		1.0		1.0		-		1.0
Issue of shares at a premium	-		0.1		-		-		-		-		0.1		-		0.1
Exercise of share options	-		-		-		0.5		-		(0.5)		-		-		-
Movement on deferred tax asset on share-based payments	-		-		-		-		-		0.8		0.8		-		0.8
Own shares acquired in the year	-		-		-		(0.1)		-		-		(0.1)		-		(0.1)
Dividends paid:
Final dividend for 2008	-		-		-		-		-		(12.7)		(12.7)		-		(12.7)
Interim dividend for 2009	-		-		-		-		-		(5.0)		(5.0)		-		(5.0)
Balance at 31 December 2009	2.2		26.7		0.6		(6.0)		(1.7)		187.6		209.4		(0.1)		209.4

Consolidated statement of changes in equity (audited) (continued)

For year ended 31 December 2009

Share premium account

The share premium account represents the difference between the fair value of consideration received and the nominal value of the shares issued.

 

Capital redemption reserve 

The capital redemption reserve was created on the redemption of preference shares in 2003.

 

Reserve for own shares held 

The shares are held as 'treasury shares' and represent the cost of shares to Morgan Sindall plc purchased in the market and held by the Morgan Sindall Employee Benefit Trust (the 'Trust') to satisfy options under the Group's share incentive schemes.

 

The number of shares held by the Trust at 31 December 2009 was 797,034 (2008: 840,864).

 

Cash flow hedging reserve 

Under cash flow hedge accounting, movements on the effective portion of the hedges are recognised through the hedging reserve, while any ineffectiveness is taken to the income statement.

 

Notes (audited)

For the year ended 31 December 2009

1.       General information

          The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 31 December 2009 or 2008, but is derived from those accounts. The annual report and accounts for the year ended 31 December 2008 have been delivered to the Registrar of Companies and those for 2009 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or 498(3) of the Companies Act 2006 or equivalent legislation.

          This preliminary announcement has been prepared solely to assist shareholders in assessing the strategies of the Board and in gauging their potential to succeed. It should not be relied on by any other party or for other purposes. Forward looking statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this preliminary results announcement. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business factors, underlying any such forward-looking information.

          Whilst the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to fully comply with IFRS. 

          In accordance with the Companies Act 2006, the Company will make the annual report and accounts for the year ended 31 December 2009 that comply with IFRS available on the Company's website on or about 19 March 2010. If a shareholder has requested to continue to receive hard copy of the annual report and accounts they will be posted on or about 19 March 2010. They will be delivered to the Registrar of Companies following the Company's annual general meeting.

2.       Basis of preparation

          Morgan Sindall's activities and the key risks facing its future development, performance and position are set out in this preliminary statement and in the Company's annual report and accounts for the year ended 31 December 2009. The directors have reviewed the current and projected position of the Group and have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual financial statements.

3.       Accounting policies

          There have been no significant changes to accounting policies, presentation or methods of preparation since the financial statements for the year ended 31 December 2008 and the period to 30 June 2009, except as described below.

          In the year, the Group commenced offering shared equity home ownership schemes. The shared equity loans receivable are a hybrid financial instrument consisting of an initial principal component and an embedded derivative whose fair value varies in accordance with movements in the specific property prices to which the loan relates. The Group has elected to designate the financial assets resulting from the shared equity scheme as fair value through profit and loss.

During the year, the Group has adopted IFRS 8 'Operating Segments' which requires operating segment information on the same basis as that used to present information internally to the Chief Operating Decision Maker. Adoption of this standard has only impacted disclosure and presentation with the Investments segment being disclosed for the first time separately.

Notes continued (audited)

For the year ended 31 December 2009

4.       Business segments

          For management purposes, the Group is organised into five operating divisions: Fit Out, Construction, Infrastructure Services, Affordable Housing, Urban Regeneration and one specialist unit, Investments. The divisions and the specialist unit are the basis on which the Group reports its primary segment information.

          Segment information about the Group's continuing operations is presented below:

2009	Fit Out		Construction		Infrastructure Services		Affordable Housing		Urban Regeneration		Investments		Group Activities				Eliminations		Total
	£m		£m		£m		£m		£m		£m		£m		£m		£m		£m
Revenue: external	291.2		743.3		769.9		373.8		31.9		3.4		-		2,213.5		-		2,213.5
Revenue: internal	2.0		20.5		31.2		1.8		-		6.1		-		61.6		(61.6)		-
Operating profit/(loss) before amortisation	13.8		13.0		17.1		14.9		0.6		(3.0)		(6.0)		50.4		-		50.4
Share of results of associates and joint ventures after tax	-		-		-		-		0.1		-		-		0.1		-		0.1
Profit/(loss) from operations before amortisation	13.8		13.0		17.1		14.9		0.7		(3.0)		(6.0)		50.5		-		50.5
Amortisation of intangible assets	-		(1.1)		(0.4)		-		(5.3)		-		-		(6.8)		-		(6.8)
Profit/(loss) from operations	13.8		11.9		16.7		14.9		(4.6)		(3.0)		(6.0)		43.7		-		43.7
Net finance income															1.0				1.0
Profit before income tax expense															44.7				44.7

Notes continued (audited)

For the year ended 31 December 2009

4.       Business segments (continued)

2008	Fit Out		Construction		Infrastructure Services		Affordable Housing		Urban Regeneration		Investments		Group Activities				Eliminations		Total
	£m		£m		£m		£m		£m		£m		£m		£m		£m		£m
Revenue: external	473.7		813.1		799.2		377.2		83.6		1.3		-		2,548.1		-		2,548.1
Revenue: internal	0.6		13.1		28.8		5.1		-		-		-		47.6		(47.6)		-
Operating profit/(loss) before amortisation	25.8		9.5		14.4		21.0		6.5		(3.5)		(9.2)		64.5		-		64.5
Share of results of associates and joint ventures after tax	-		-		-		-		1.3		1.3		-		2.6		-		2.6
Profit/(loss) from operations before amortisation	25.8		9.5		14.4		21.0		7.8		(2.2)		(9.2)		67.1		-		67.1
Amortisation of intangible assets	-		(2.1)		(0.8)		-		(6.2)		-		-		(9.1)		-		(9.1)
Profit/(loss) from operations	25.8		7.4		13.6		21.0		1.6		(2.2)		(9.2)		58.0		-		58.0
Net finance income															4.3				4.3
Profit before income tax expense															62.3				62.3

Significantly all of the Group's operations are carried out in the UK.

5.       Income tax expense

		2009		2008
		£m		£m
Current tax expense:
UK corporation tax		12.2		18.1
Adjustment in respect of prior years		(1.1)		(1.3)
		11.1		16.8
Deferred tax expense:
Current year		0.8		0.1
Adjustment in respect of prior years		(0.1)		0.6
		0.7		0.7
Income tax expense for the year		11.8		17.5

Corporation tax is calculated at 28.0% (2008: 28.5%) of the estimated assessable profit for the year. The corporation tax rate has changed due to rates reducing from 30% to 28%, effective from 1 April 2008.

Notes continued (audited)

For the year ended 31 December 2009

5.       Income tax expense (continued)

The charge for the year of £11.5m (2008: £17.5m) is lower than the standard rate of corporation tax in the UK of 28.0% (2008: 28.5%).  The difference can be reconciled as follows:

		2009		2008
		£m		£m
Current tax expense:
Profit before tax		44.7		62.3
Income tax expense at UK corporation tax rate		12.5		17.7
Tax effect of:
Share of net profit of equity accounted joint ventures		-		(0.7)
Expenses that are not deductible in determining taxable profits		0.8		1.2
Adjustments in respect of prior years		(1.2)		(0.7)
Other		(0.3)		-
Income tax expense for the year		11.8		17.5
Effective tax rate for the year		26.4%		28.1%
Effective tax rate for the year ignoring prior year adjustments		29.1%		29.2%

6.       Dividends

		2009		2008
		£m		£m
Final dividend for the year ended 31 December 2008 of 30.00p (2007: 28.0p) per share		12.7		11.9
Interim dividend for the year ended 31 December 2009 of 12.0p (2008: 12.0p) per share		5.0		5.1
		17.7		17.0
Second interim dividend in place of a final dividend for the year ended 31 December 2009 of 30.0p (2008: final dividend of 30.0p) per share		12.7		12.7

The second interim dividend has been declared, subject to the 2009 financial statements becoming relevant accounts for the purpose of the Companies Act 2006 and, subject as aforesaid, will be paid on 1 April 2010 to shareholders on the register at 12 March 2010. The ex-dividend date will be 10 March 2010. It has not been included as a liability in these financial statements. 

Notes continued (audited)

For the year ended 31 December 2009

7.       Earnings per share

There are no discontinued operations in either the current or prior year.

The calculation of the basic and diluted earnings per share is based on the following data:

		2009		2008
Earnings		£m		£m
Earnings before tax		44.7		62.3
Deduct tax expense per the income statement		(11.8)		(17.5)
Minority interest		0.1		-
Earnings for the purposes of basic and dilutive earnings per share being net profit attributable to equity holders of the parent company		33.0		44.8
Add back current year's amortisation expense pre tax		6.8		9.1
Earnings for the purposes of basic and dilutive earnings per share before amortisation expense being attributable to equity holders of the parent company		39.8		53.9

		2009		2008
Number of shares		No. 000's		No. 000's
Weighted average number of ordinary shares for the purposes of basic earnings per share		42,281		42,108
Effect of dilutive potential ordinary shares:
Share options		92		268
Conditional shares not vested		332		196
Weighted average number of ordinary shares for the purposes of diluted earnings per share		42,705		42,572

The average market value of the Company's shares for the purpose of calculating the dilutive effect of share options and long-term incentive plan shares was based on quoted market prices for the year that the options were outstanding. The weighted average share price for the year was £6.11 (2008: £7.36)

Earnings per share as calculated in accordance with IAS33, 'Earnings per Share' are disclosed below:

		2009		2008
Basic earnings per share		77.9p		106.3p
Diluted earnings per share		77.1p		105.1p

Adjusted earnings per share as disclosed below:

		2009		2008
Basic earnings per share before amortisation expense		93.9p		127.8p
Diluted earnings per share before amortisation expense		93.0p		126.4p

Notes continued (audited)

For the year ended 31 December 2009

7.       Earnings per share (continued)

          A total of 2,820,160 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 31 December 2009 (2008: 1,171,003).

8.       Cash flows from operating activities

	2009		2008
	£m		£m
Profit from operations for the year	43.7		58.0
Adjusted for:
Amortisation of fixed life intangible assets	6.8		9.1
Share of net profit of equity accounted joint ventures	(0.1)		(2.6)
Depreciation of property, plant and equipment	9.3		8.1
Expense in respect of share options	1.0		2.3
Defined benefit plan payment	(0.7)		(0.7)
Defined benefit plan charge	0.3		0.2
Gain on disposal of property, plant and equipment	(0.4)		(0.2)
Increase in shared equity loan receivables	(9.0)		-
Write downs on work in progress recognised as an expense	1.0		-
Decrease in provisions	(1.5)		(1.0)
Operating cash flows before movements in working capital	50.4		73.2
Decrease/(increase) in inventories	29.1		(41.2)
Decrease in receivables	62.3		48.8
Decrease in payables	(122.7)		(122.9)
	(31.3)		(115.3)
Cash generated/(utilised) from operations	19.1		(42.1)
Income taxes received/(paid)	7.7		(18.9)
Interest paid	(1.8)		(4.5)
Net cash inflow/(outflow) from operating activities	25.0		(65.5)

Additions to leased property, plant and equipment during the year amounting to £2.0m (2008: £6.3m) and additions to leasehold property amounting to £0.2m (2008: £nil) were financed by new finance leases. Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

Notes continued (audited)

For the year ended 31 December 2009

9.         Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.

Trading transactions

During the year, Group companies entered into the following significant transactions with related parties. Transactions and amounts owed at the year end are as follows:

	Provision of goods and services				Amounts owed by/(to) related parties
	2009		2008		2009		2008
	£m		£m		£m		£m
Claymore Roads (Holdings) Limited	-		0.1		-		0.1
Morgan-Vinci Limited	0.1		-		-		0.1
Community Solutions for Primary Care (Holdings) Limited	12.9		41.0		1.4		2.2
Renaissance Miles Platting Limited	0.1		-		-		-
Blue Light Holdings Limited	15.0		20.3		0.2		1.3
Ashton Moss Developments Limited	-		-		(0.2)		(0.2)
Bromley Park Limited	-		-		(0.6)		(6.1)
Chatham Place (Building 1) Limited	0.4		0.3		-		0.1
ECf (General Partner) Limited	1.4		1.5		0.6		-
Eurocentral Partnership Limited	-		1.4		0.2		0.2
Lewisham Gateway Developments Limited	-		-		0.2		0.1
Lingley Mere Business Park Development Company Limited	0.3		2.3		-		(3.5)
North Shore Development Partnership Limited	-		-		0.1		0.1
Ician Developments Limited	-		-		0.4		-
The Compendium Group Limited	1.4		2.2		-		-
	31.6		69.1		2.3		(5.6)

					Amounts owed by/(to) related parties
					2009		2008
					£m		£m
Amounts owed by related parties					3.1		4.2
Amounts owed to related parties					(0.8)		(9.8)
					2.3		(5.6)

All transactions with related parties were made on an arm's length basis.

Notes continued (audited)

For the year ended 31 December 2009

9.         Related party transactions (continued)

The amounts outstanding are unsecured and will be settled in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given or received. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed or owing by related parties are non-interest bearing.

10.     Contingent liabilities

Group banking facilities and surety bonds are supported by cross guarantees given by the Company and participating companies within the Group. There are contingent liabilities in respect of surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.

11.     Key risks

The Group's achievement of its strategy and vision is subject to a number of key risks. Risk management processes are designed to continually assess, identify, understand and challenge the effectiveness of mitigating actions. The Board considers that the most significant risks and the main mitigating actions are:

	Risks	Impacts	Mitigation
Market and economic environment The market sectors in which the Group operates are affected to varying degrees by general macroeconomic conditions and changes in Government spending priorities. The Group is particularly focused at present on managing impacts of the challenging economic conditions and continuing to invest for the long-term to be prepared for opportunities when they arise.	·      Shortage of opportunities caused by macroeconomic factors ·      Reliance on key customers and sectors and increased competition ·      Projects consuming excessive capital inhibit growth ·      Inability to manage overheads during downturn ·      More onerous financial security such as bonding and other financial guarantees required in current market in order to qualify for work	·      Loss of revenue, profit effect magnified if overheads not managed appropriately ·      Increased competition leads to falling margins on work ·      Excessive consumption of cash leads to inability to carry out work	·      Delegated authorities in place throughout the Group require approval of tenders at appropriate levels ·      Refusal to compete solely on price: Perfect Delivery quality programme seeks to differentiate the Group's offering on service and quality ·      Adequacy of cash resources and facilities available, bonding lines and insurance programme are kept under constant review ·      Sector spread and diversification offers some protection against decline in individual sectors ·      Regular feedback from clients and others used to tailor the Group's offering ·      Regular monitoring and reporting of financial performance, work won, prospects and pipeline of opportunities ·      Regular review of resource levels against anticipated workload

Notes continued (audited)

For the year ended 31 December 2009

11.       Key risks (continued)

	Risks	Impacts	Mitigation
Regulatory environment The Group operates within a constantly changing regulatory environment governed by legislation and industry specific regulation. Non-compliance with legislation or regulations can damage the Group's reputation, market standing and ability to secure new business and may lead to financial penalties.	·      Regulatory or legislative breach, failure to understand regulatory environment ·      Failure of employees and subcontractors to comply with legislation	·      Loss of reputation, market share, cost of investigation fines and prosecutions	·      Regular communication of relevant regulation, including changes and amendments. Key regulatory risks dealt with in Group policies and induction processes ·      Regular training and updates for those with responsibility for ensuring compliance ·      Regular reporting of significant measures relevant to regulation ·      Systems of management to identify risks and controls, audits and reviews to ensure that controls are operating effectively  ·      Periodic reviews by external professionals and involvement of external experts in training where necessary ·      Whistleblowing and ethical policies and procedures in place
Health, safety and environmental risks The Group's health and safety and environmental performance affect employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance.	·      Environmental or safety incidents caused by the Group's activities	·      Harm to individuals and communities, reputational damage, loss of market share fines and prosecutions	·      Health and safety and environmental policy frameworks are communicated and senior managers appointed in each division ·      Well established safety systems, site visits, monitoring and reporting (including near miss and potential hazard reporting) in place ·      Investigation and root cause analysis of accidents and near misses ·      Regular health and safety and environmental training and updates including behavioural training ·      Certification of workforce under Construction Skills Certification Scheme

Notes continued (audited)

For the year ended 31 December 2009

11.       Key risks (continued)

	Risks	Impacts	Mitigation
Developing talent The ability of the Group to deliver projects successfully to clients, grow in profitability and develop strong, sustained financial performance relies on the quality of its employees. It is critical that talented individuals are attracted, developed and retained.	·      Failure to attract talented individuals to the construction industry ·      Inadequate succession planning ·      Failure to retain talented individuals	·      Group and divisions fail to develop the people necessary to provide future growth ·      Talented people see better opportunities for reward and satisfaction in other industries or with competitors	·      Management development programmes in place alongside formal individual appraisal and development processes ·      Regular review of remuneration levels and competitive bonus structure ·      Long-term incentivisation through Save As You Earn and share option schemes ·      Succession and staff development considered in annual and longer-term business planning cycle
Contractual risks The Group undertakes several hundred contracts each year and it is important that contractual terms reflect risks arising from the nature and complexity of the works and the duration of the contract.	·      Acceptance of work outside core competences ·      Acceptance of unprofitable work ·      Poor project management leads to delays and cost overruns ·      Inability to agree valuation of additional work and variations	·      Loss of profitability and reputation ·      Excessive resources and attention devoted to poorly performing projects	·      System of delegated authorities governs tenders and acceptance of work ·      Work carried out under standard terms wherever possible ·      Well established systems of measuring and reporting project progress and estimated outturns ·      Collation and review of client feedback ·      Lessons learned exercises carried out on projects ·      Use of approved subcontractors with established relationships wherever possible ·      Staff incentivised on basis of contract performance ·      Cross regional peer reviews

Notes continued (audited)

For the year ended 31 December 2009

11.       Key risks (continued)

	Risks	Impacts	Mitigation
Acquisitions The Group regularly identifies and evaluates potential acquisitions and it is important that acquisitions deliver the planned benefits.	·      Group fails to deliver benefits sought at time of acquisition, through issues with due diligence, execution, strategic assessment, alignment of cultures or other reasons	·      Loss of profitability and reputation ·      Excessive resources required to be directed towards acquisition	·      All acquisitions approved at Board level ·      Commercial and financial due diligence led by senior teams including executive directors, with clear roles and responsibilities ·      Post acquisition integration plans prepared and monitored ·      KPIs established and monitored post acquisition ·      Feedback sought from market via analysts and press monitoring prior to acquisition
Counterparty and liquidity risks The terms on which the Group trades with counterparties affect its liquidity. Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern.	·      Insolvency of key client, subcontractor or supplier ·      Inadequate liquidity	·      Significant financial loss due to bad debt, cost of replacing supplier ·      Reputational impact ·      Group cannot continue in business, or can not grow as desired, due to lack of funds	·      Work only carried out for financially sound clients, established through credit checks ·      Work with preferred suppliers wherever possible ·      Contracts with clients, subcontractors or suppliers only entered into after review at appropriate level of delegated authority ·      Work carried out under standard terms of contract as far as possible ·      Specific commercial terms, including payment terms. Escrow accounts used as appropriate ·      Regular monitoring of cash levels and forecasting of cash balances ·      Regular stress testing of longer-term cash forecasts ·      Regular assessment of the level of banking facilities available to the Group  ·      Regular monitoring of banking covenants

Notes continued (audited)

For the year ended 31 December 2009

12.     Appointment of non-executive director

Save as set out in this announcement, there are no other details requiring disclosure under Listing Rule 9.6.13R in relation to Simon Gulliford.

Responsibility statement

The responsibility statement below has been prepared in connection with the Company's annual report and accounts for the year ended 31 December 2009. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

·           The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·           The business review, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board on 23 February 2010 and is signed on its behalf by:

Paul Smith                                      David Mulligan

Chief Executive                                Finance Director

23 February 2010

 

END

 

 

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