Final Results

RNS Number : 7738X

Morgan Sindall Group PLC

21 February 2012

 



MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'the Group')

Preliminary results for the year ended 31 December 2011

Morgan Sindall Group plc, the construction and regeneration group, today announces its preliminary results for the year ended 31 December 2011.

	2011	2010	Change
Revenue	£2,227m	£2,102m	+6%
Profit before tax, amortisation and non-recurring items	£45.3m	£51.3m	-12%
Profit before tax	£40.0m	£40.7m	-2%
Year end cash balance	£109m	£149m	-27%
Average cash balance1	£23m	£63m	-63%
Adjusted earnings per share2	82.5p	92.9p	-11%
Basic earnings per share	77.5p	70.5p	+10%
Total dividend per share	42.0p	42.0p	n/c
1 Average cash is the average of the daily treasury balances for the year
2 Basic earnings per share before amortisation of intangible assets of £3.9m (2010: £5.5m), non-recurring items of £1.4m (2010: £5.1m) and adjusted for one-off tax benefit of £2.8m (2010: £nil)

Financial highlights

·       Resilient performance, in line with expectations

·       Balance sheet strong; year end cash £109m (2010: £149m) and average cash £23m (2010: £63m), reflecting significant investment in regeneration, and working capital outflow following strong 2010 performance

·       Further £9m of annualised cost savings achieved (2010: £21m)

·       Full year dividend maintained at 42.0p for fourth consecutive year, reflecting balance sheet strength and confidence in medium-term outlook

Strategic highlights

·       Continuing to develop market position across construction activities and investing in regeneration

·       Breadth of skills enabling us to maximise opportunities in growing market sectors

·       Investment of £20m during 2011 in regeneration; targeting average ROCE of 15% through cycle

·       Reduction in public sector exposure from 70% in 2009 to 50% in 2011; expect further reduction in 2012

Outlook

·       Sound outlook with stable forward order book at £3.4bn (2010: £3.6bn), 26% of which is expected revenue from frameworks

·       In addition, growing regeneration pipeline of £1.8bn (2010: £1.4bn), with a further £0.6bn of regeneration schemes at preferred developer stage

·       Opportunities in growth sectors of infrastructure and London commercial, leveraging Group's experience and track record

·       Release of land from public sector will drive mixed-use and housing led regeneration

·       Market remains challenging in short-term; medium-term outlook more promising

John Morgan, Executive Chairman, commented:

"We are pleased to report a solid set of results for 2011 in line with expectations, despite continued challenging markets. We are benefiting from being a broadly based business, offering creative, integrated solutions for increasingly complex projects, with a track record of delivery. We are focused on maximising opportunities in sectors we believe offer the most growth and reward. We continue to invest for sustainable growth in the medium-term whilst maintaining a strong balance sheet and dividend."

Divisional Highlights

* Operating profit is profit from operations before amortisation of intangible assets and non-recurring items.

Construction and Infrastructure

·       Operating profit* of £21.1m (2010: £26.9m) on increased revenue of £1,268m (2010: £1,250m)

·       As expected, competitive market has led to margin at 1.7% (2010: 2.2%)

·       Key projects secured in growing infrastructure sectors of roads, rail, aviation, and energy distribution all benefiting from increased integrated offering

·       Reducing public sector exposure although opportunities remain in education and infrastructure

·       Seeing slow recovery of London commercial sector

·       Healthy forward order book of £1.6bn (2010: £2.0bn); projects at preferred bidder stage of £0.3bn

Fit Out

·       Grown market share in fiercely competitive market with revenue up by 6% to £438m (2010: £415m)

·       Operating profit* of £12.4m (2010: £14.8m) resulting in margin of 2.8% (2010: 3.6%)

·       Growth in retail banking, technology and education sectors

·       Recovery expected to be slower and later than expected; 1 million sq ft of space expected onto market in 2013-14

·       Forward order book of £216m (2010: £180m) underpins stable outlook for coming year

Affordable Housing

·       Significant increase in operating profit*, up 14.1% to £18.6m (2010: £16.1m) on revenue of £462m (2010: £387m)

·       Growth driven by full year impact of Connaught acquisition

·       Margin firm at 4.0% (2010: 4.2%), due to changing work mix

·       Signs of improving market conditions on more recent mixed-tenure sites

·       Connaught acquisition now integrated and debt recovery on target at £20m

·       Stable forward order book at £1.5bn (2010: £1.5bn)

Urban Regeneration

·       Increased activity led to operating profit* almost doubling to £3.9m (2010: £2.0m) on increased revenue of £57m (2010: £46m)

·       Regeneration increasing activity; on-site with £100m of construction work

·       Five new regeneration schemes secured during the year valued at £0.8bn

·       Increased importance of regeneration driven by public sector land release

·       Capital employed of £66m (2010: £67m); targeting 15% average ROCE through cycle

·       Growing regeneration pipeline of £1.6bn (2010: £1.4bn), with a further £0.6bn at preferred developer stage underpins expected progress in 2012

Investments

·       Directors' portfolio valuation of £49m (2010: £41m) at 31 December 2011

·       Total equity invested of £19m (2010: £15m) with further £10m committed (2010: £12m); carrying value of £23m (2010: £18m)

·       Notable schemes achieved financial close in the year; £0.4bn Bournemouth regeneration scheme and second tranche of the £0.4bn Hull Building Schools for the Future programme

·       Focus on land-swap opportunities as public sector grant funding reduces

·       Regeneration pipeline of £0.2bn (2010: £nil)

·       Recent sale of Dorset Fire & Rescue PFI for £3.8m, which represents a 7% discount rate on the directors' valuation cashflows

Key financial information

·       Revenue up 6% to £2.23bn (2010: £2.10bn)

·       Adjusted PBT (before amortisation and non-recurring items) of £45.3m (2010: £51.3m)

·       Amortisation of £3.9m (2010: £5.5m) and non-recurring items, as expected, of £1.4m (2010: £5.1m) relating to modification of IT systems following the merger of our construction and infrastructure activities in 2010

·       PBT of £40.0m (2010: £40.7m)

·       Average cash balance of £23m (2010: £63m), reflecting investment in regeneration and growth of shared equity and increase in investment properties

·       Year end cash of £108.9m (2010: £148.6m) reflects regeneration investment and the unwinding of working capital following a strong performance at the 2010 year-end

·       Fair value tax matter successfully resolved with HMRC leading to £2.8m one-off benefit to tax charge

ENQUIRIES:
Morgan Sindall Group plc	Tel: [phone]
John Morgan, Executive Chairman
Paul Smith, Chief Executive
David Mulligan, Finance Director
Brunswick	Tel: [phone]
Nina Coad/Nick Cosgrove

 

Morgan Sindall Group will hold its preliminary results presentation for analysts and institutional investors at 9.30am on 21 February 2012 at Brunswick Group, 16 Lincolns Inn Fields, London, WC2A 3ED.

 

A copy of the presentation and an audio webcast will be available from 12.00pm at

www.corporate.morgansindall.com/investors.

This preliminary report and other information about Morgan Sindall Group plc are available on its website

www.corporate.morgansindall.com/investors  via the link to the corporate site.

CHAIRMAN'S STATEMENT

2011 has seen a resilient performance from the Group, delivering results in line with our expectations consistently over the past twelve months despite demanding market conditions.

The Group's results are testament to our straightforward approach to construction and regeneration. This is underpinned by our relentless focus on quality through the rigorous application of our own Perfect Delivery programme and the creative and innovative approach we bring to projects.

Strategy for success

For a number of years the Group's goal has been to create leading positions in our chosen sectors and we continue to make significant progress towards that goal. We measure our performance by the quality of our margin, not necessarily by the size of a project and we achieve a premium margin by providing our clients with an exceptional service.

Achieving success in today's market means staying focused on what we do best within the sectors we know well. We define success in a number of ways, from achieving quality margin and growing the business profitably through to being nominated the partner of choice, selected as the preferred employer and considered a responsible and forward-thinking group.

We have achieved success this year, through winning key construction opportunities in growth areas of the market, namely energy, transport and commercial as well as growing our regeneration pipeline of work by securing five major schemes together valued at £0.8bn.

Looking ahead, our strategic focus is to develop our market position across our construction activities and to use the cash generated from those operations to invest in, and grow, our regeneration-related businesses. We continue to broaden our capability and service to our clients through the Group's ability to deliver large-scale complex projects and believe our chosen markets offer the best prospects for quality margin in our industry and the greatest potential for revenue growth.

Enabling growth

The breadth of our skills extends across a wide range of sectors where we have built leading reputations and this enables us to be flexible in our approach and to target those sectors that offer the most growth potential.

Our extensive capability in Construction and Infrastructure, Fit Out, Affordable Housing and Urban Regeneration, underpinned by Investments' ability to offer financing solutions, allows us to reduce project complexities and optimise opportunities for our clients and partners.

Working in partnership to deliver regeneration

There is an acute need to promote economic improvement and social inclusion alongside regenerating the physical fabric of many of our towns and cities and the Group remains confident in the prospects offered by this market, driven by the release of land by the public sector. Regeneration is all about working in long-term partnerships with our clients, using their land assets to achieve large-scale social and economic renewal.

The public sector owns an estimated £17bn portfolio of surplus land and property assets. In a market with diminishing in-house expertise and an increasing reliance on private sector funding to progress critical regeneration schemes, our ability to provide creative funding solutions, development and construction expertise positions us as an attractive regeneration partner and provides us with significant investment opportunities in the medium- and long-term.

Our people

I spend much of my time visiting our offices and projects and I am always impressed with the calibre and integrity of our people across all levels. Their talent, commitment and positive approach are integral to the success of the Group. We remain committed to their well-being at all times and will continue to invest in their personal and professional development and to motivate and incentivise them appropriately.

The Board

I am also grateful to the members of the Board whose stewardship and guidance contribute greatly to the performance of the Group. Gill Barr, one of our independent non-executive directors, is standing down at the forthcoming AGM in 2012. I would like to take this opportunity to thank Gill for her substantial contribution to the Group over the past seven years.

Dividend statement

The Board recommends a final dividend of 30.0p payable on 18 May 2012, giving an unchanged total dividend for the fourth consecutive year of 42.0p for 2011.

Looking forward

We recognise that market challenges and risks remain and will continue to impact the year ahead and we believe that the medium-term outlook is more promising. We have positioned the Group to maximise opportunities in those sectors we believe will offer the most growth and reward. We continue to closely monitor our cost base, shape the divisions and tailor the way we work to respond to changes in the market. Our decentralised business model and lack of bureaucracy enable us to respond swiftly to shifts in economic and operating conditions, ensuring we remain alive to opportunities.

We entered the new year clear in our vision and our strategic direction. With a stable forward order book of £3.4bn and, importantly, a growing regeneration pipeline of £1.8bn, we are confident that we are in a strong position to capitalise on future opportunities and to deliver sustained long-term value for our shareholders and clients.

CHIEF EXECUTIVE's REVIEW

The Group delivered in 2011 in the face of challenging economic conditions and ongoing constraints in public spending. We remain in a strong financial position and have strategically positioned the Group to take advantage of the significant opportunities that exist in the UK.

Revenue was up by 6% to £2,227m (2010: £2,102m) with profit before tax, amortisation and non-recurring items of £45.3m (2010: £51.3m), reflecting the challenging market conditions. £1.4m (2010: £3.2m) of non-recurring items arose, as expected, relating to IT costs following the merger of the Construction and Infrastructure Services divisions in 2010. Profit before tax was £40.0m (2010: £40.7m). Adjusted earnings per share before amortisation of intangible assets, non-recurring items and one-off tax benefit were 82.5p (2010: 92.9p). The Group's continuing investment in regeneration, increase in investment properties and use of shared equity to support open market house sales has been reflected in our average cash for 2011 being lower than in 2010 at £23m (2010: £63m).

Success across the board

Each division has achieved wide-ranging success throughout the year, demonstrating not only its specialist skills but also the strength and the value of the Group's integrated capability. 2011 saw higher levels of collaboration between the Group's divisions than ever before. Projects that demonstrate the success and value of divisions working together include the completion, on time and on budget, of the Basildon Sporting Village. Working within a 25-year agreement with Basildon Borough Council, our Investments division provided a funding solution and development expertise, whilst design and construction services were provided by our Construction and Infrastructure division. Another example of our integrated approach is Urban Regeneration's 56-acre, £300m Northshore development in Stockton-on-Tees which will transform Stockton's Riverside by delivering 1.8m sq ft of offices, leisure and retail accommodation in addition to high quality housing. The first phase is currently on site with our Affordable Housing division working with colleagues in Urban Regeneration to build 50 energy-efficient affordable houses.

Construction and Infrastructure has performed in line with our expectations despite operating within a very competitive and challenging market place. With revenue slightly increased at £1,268m (2010: £1,250m) and operating profit* of £21.1m (2010: £26.9m), it has further reinforced its market leading positions in tunnelling and aviation and substantially strengthened its leading reputation in the rail, highways and energy markets. Notable achievements include securing major contracts in each of these growth infrastructure sectors as well as considerable success in being awarded new and renewed positions on some of the UK's major construction frameworks. An example of which is the division's appointment as preferred bidder, in joint venture, for an electricity transmission overhead line partnership worth up to £500m to deliver National Grid's overhead line construction programme for the next five years. It entered the new financial year with a healthy pipeline of opportunities in key sectors of the infrastructure market.

Fit Out has delivered another consistent performance for the Group. The division has grown market share in tough trading conditions with revenue increasing to £438m (2010: £415m), with work secured via frameworks doubling. Operating profit* was £12.4m (2010: £14.8m). It has responded to market constraints by launching a new technology division to capitalise on existing skill sets and to respond to the needs of clients who are actively seeking an extended service to deliver infrastructure, data centre and technology-led projects. Growth markets identified for the new financial year include retail banking, technology and the education sector where the division continues to work with universities under pressure to improve facilities to attract students.

Affordable Housing has swiftly capitalised on the wider business opportunities resulting from the successful integration of the Connaught business. It has exploited its full service capability with revenue increasing significantly to £462m (2010: £387m) and secured growth in operating profit* to £18.5m (2010: £16.1m). Its strengthened service offering has led to an agreement with Barnet Homes, worth approximately £103m over 10 years, to deliver planned refurbishment and electrical work across the London Borough of Barnet's 15,000-home portfolio. Its increased capability to provide nationwide reactive maintenance services, alongside its planned maintenance and design and build of mixed-tenure affordable housing, has provided a strong platform for continuing success in 2012.

Urban Regeneration has increased its contribution to the Group this year with operating profit* almost doubling to £3.9m (2010: £2.0m), underpinning our confidence in the regeneration market. It has secured five major new schemes, substantially increased its regeneration pipeline to £1.6bn (2010: £1.4bn), with a further £0.6bn at preferred developer stage, and has increased its level of on-site activity. The division is successfully positioning schemes to capitalise on opportunities as market conditions improve.

Investments has achieved notable success in 2011 facilitating project development, primarily in the public sector by providing flexible financial solutions and development expertise. Despite limited opportunities the division has been successful in securing a £500m, 20-year development agreement with Bournemouth Borough Council and commenced the second tranche of schools within Hull City Council's Building Schools for the Future programme. The directors' valuation of its investment portfolio has increased significantly to £49m (2010: £41m) providing sustained long-term value for the Group. We will recycle capital from maturing investments from time to time and recently sold our interest in the Dorset Fire & Rescue PFI for £3.8m, which was above our directors' valuation.

An increased focus on regeneration

We are already leading a number of complex regeneration programmes across the country through our Investments, Urban Regeneration and Affordable Housing divisions. They are all working in long-term partnerships with the private and public sectors, unlocking land values for our clients and helping to regenerate deprived neighbourhoods across the country.

The ability of the Group to maximise regeneration opportunities today was strengthened by the acquisition of the Amec construction business and developments division in 2007. At the time we stated that the acquisition would open up significant growth opportunities. Having strategically shaped the Group since then and with significant growth achieved in our regeneration pipeline, currently standing at £1.8bn, we are now in a strong position to capitalise on future opportunities and secure organic growth in this market.

We intend to build on successes achieved to date and increase our focus on this market, allowing the Group to benefit from the quality of returns available through medium- to long-term urban and residential regeneration programmes. The continuing reluctance of banks to lend has led to the forced withdrawal of many players from the marketplace, resulting in a less competitive environment. Barriers to entry are high and the skill sets required are a perfect fit with the Group's specialist expertise.

The decision to invest more significantly in regeneration will create opportunities for all Group divisions. It will have an impact on our level of cash reserves but we are confident that our business model, which limits open market site acquisition and uses working capital more efficiently in phased developments, will ensure that the Group and its shareholders will benefit from the opportunity to secure healthy, long-term and sustainable profit streams.

Outlook

Our outlook is sound with a strong balance sheet, a steady forward order book of £3.4bn (2010: £3.6bn), and a significant and growing regeneration pipeline of £1.8bn (2010: £1.4bn), with a further £0.6bn at preferred developer, all providing a level of resilience to economic fluctuations. Whilst we acknowledge the challenges that lie ahead, we are confident that the investment in regeneration and focus on opportunities in growing sectors of the market will lead to higher quality and sustained medium-term returns.

DIVISIONAL PERFORMANCE

CONSTRUCTION AND INFRASTRUCTURE

The Construction and Infrastructure division, operating as Morgan Sindall, offers national design, construction and infrastructure services to private and public sector customers. The division works on projects of all sizes across a broad range of sectors including commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport, waste and water.

	2011	2010	Change
Revenue	£1,268m	£1,250m	+1%
Operating profit*	£21.1m	£26.9m	-22%
Margin	1.7%	2.2%
Forward order book	£1.6bn	£2.0bn	-40%

Division delivers in testing market

Revenue was slightly increased at £1,268m (2010: £1,250m) with reduced operating profit* and margin of £21.1m and 1.7% respectively (2010: £26.9m, 2.2%), reflecting extremely challenging and competitive trading conditions. This performance was in line with our expectations. The division has delivered major projects, won awards of national significance and secured and retained long-term framework agreements, enabling the division to enter 2012 with a healthy forward order book. 2011 saw the division appointed to eight new frameworks, renewed four others, bringing its total number of frameworks to 57. Its recently integrated offering has opened up new opportunities, especially within the road, rail and airport sectors where major clients attach significant value to the broader service.

Operating within a testing market, it has focused on driving efficiencies across the business, protecting margins and setting new standards in customer service. Delivering in line with financial expectations in the current economic climate is a notable achievement and the division has been especially successful in securing opportunities in the growing infrastructure sectors of roads, rail, aviation and energy distribution.

Growing reputation in infrastructure

A year ago the division identified a number of growing sectors of the market and set out to secure key opportunities in each. It has been successful in achieving this goal through a mix of securing high profile projects and major framework appointments and renewals.

Within the rail sector, Crossrail continues to be a valued client. The largest construction project in Europe, Crossrail will deliver a 118km rail line linking Maidenhead and Heathrow in the west with Shenfield and Abbey Wood in the east. New awards in 2011, gained through the division working on its own or in joint venture, totalled over £415m and include construction of a new station at Pudding Mill Lane, the Whitechapel and Liverpool Street station tunnels and Whitechapel main station works. Also in the rail sector, the Colas Rail Morgan Sindall joint venture has been selected to carry out works over three years on the £750m Enhancements Multi Asset Framework Agreement, delivering a range of civils, track and signalling projects for Network Rail.

In the energy sector, the division has been appointed preferred bidder, in joint venture, for an electricity transmission overhead line partnership worth up to £500m to deliver National Grid's overhead line construction programme for the next five years. In addition, a Morgan Sindall consortium has been awarded a five-year contract extension by National Grid's Electricity Alliance Central to deliver major enhancements to the UK's electric transmission infrastructure.

Within aviation, the division has reinforced its market-leading position and is currently working at nine of the UK's 15 major airports. Highlights include the delivery of Gatwick Airport's £50m North Terminal extension for owners Global Infrastructure Partners; the award of a place on Gatwick's construction framework for its £1.2bn programme of upgrades and improvements; the construction of the £10m Air Traffic Control Tower at Birmingham Airport and the securing of the £7m Air Traffic Control Tower construction project at Manchester Airport. The division's full service offering is being utilised by BAA in the design and build of a new £30m energy centre at Heathrow Airport.

On the UK's highways, the division completed the £440m M74 project in Scotland working in joint venture and has also been awarded a £136m joint venture construction contract to upgrade the M62 as part of the Highways Agency's four-year, up to £2bn, National Major Projects Framework.

Water remains an important sector with the division supporting some of the UK's leading water authorities. Work continues on the four-mile Lee Tunnel, London's deepest ever tunnel, helping to create a cleaner, healthier River Thames. Undertaken for Thames Water, the £417m project is set for completion in 2015. In joint venture, the division has been appointed to build a pioneering bio-gas plant with a contract value of £25m as part of Yorkshire Water's AMP5 Large Projects framework to which the joint venture was appointed in 2010.

Education continues to be a successful sector for the division, despite cuts in public spending. South Lanarkshire Council appointed the division to a four-year, £150m primary school modernisation programme - the latest phase of the council's new-build and refurbishment framework for its primary estate.

Integrated approach

Opportunities were also secured in conjunction with the Investments division. They include working on the 20-year Bournemouth Town Centre Vision, securing contracts to the value of £65m as part of Hull City Council's Building Schools for the Future programme and continuing to deliver the design and build contract for the £95m Tayside Acute Adult Mental Health Developments project in Scotland.

Joint appointment with the Affordable Housing division, Lovell, on the £3bn Constructing West Midlands Framework demonstrates the value of divisions working together, as does working on a number of projects as part of the division's reappointment on the £1bn Improvement and Efficiency South East (iESE) framework with the Group's specialist Fit Out business, Overbury.

Focus on growth sectors

With an encouraging forward order book of £1.6bn (2010: £2.0bn), together with projects at preferred bidder stage valued at £0.3bn, the division's strategy for 2012 focuses on building its market position and continuing to broaden its market offering. At the core of the strategy lies seeking opportunities where the division can add real value through working in open and transparent collaboration, identifying innovative solutions and delivering exceptional customer experience. The focus remains on growth sectors where superior expertise is demanded, where a track record is a requisite and where margins are less constrained. Sectors include road, rail, aviation, and energy distribution, which are all areas where the division has an enviable reputation through its delivery record and trusted approach. The commercial sector in London is another market where the integrated offering of construction and fit out being delivered together is considered of value.

The division will continue to respond to its challenging environment through selective bidding for opportunities that best suit its strengths. Identifying innovative best value solutions for clients remains a priority alongside the development and careful management of supply chains. 

FIT OUT

Our Fit Out division, operating as Overbury and Morgan Lovell, specialises in fit out and refurbishment projects in the office, education, retail, technology and leisure sectors through Overbury as a national fit out company operating through multiple procurement routes and Morgan Lovell specialising in the design and build of offices in London and the South.

	2011	2010	Change
Revenue	£438m	£415m	+6%
Operating profit*	£12.4m	£14.8m	-16%
Margin	2.8%	3.6%
Forward order book	£216m	£180m	+20%

2011 robust performance in competitive market

Revenue increased to £438m (2010: £415m) with operating profit* reduced to £12.4m (2010: £14.8m) and margin percentage reduced, as expected, to 2.8% (2010: 3.6%). 2011 saw activity remain robust despite the competitive environment and reduced pipeline of major projects and we believe that the division has taken further market share, now standing at over 25%.

Despite continuing tight margins and price sensitivity, clients have demonstrated that the division's brand reputation, exceptional standards in delivery and market leading customer experience are valued at a premium. Work secured via frameworks has doubled with a mix of new awards and renewals. The division's considerable investment in quality has been rewarded with exceptional levels of loyalty from its framework clients including Royal Bank of Scotland, the BBC, Threadneedle and Liverpool Victoria amongst others. 

Its track record in successfully delivering complex projects within demanding time scales, whether buildings are vacant or occupied, has positioned the division as the partner of choice in the eyes of owners, occupiers and consultants.

Growth in new sectors

2011 saw the division deliver another consistent performance for the Group. A new technology division was launched in direct response to the needs of clients who seek an extended service to deliver infrastructure, data centre and technology-led projects. The formation of this new business has allowed the division to further develop existing relationships and it has secured opportunities with Northern Trust and has a healthy list of ongoing opportunities in this dynamic market. The division's decentralised structure has allowed the creation of specialised teams with sector specific skills, operating on a wide range of projects from dedicated regional offices with a new office opening in Leeds.

The division has increased its share of retail banking frameworks and is a partner for three of the five major UK banks. It can now offer an integrated service to meet the banks' office, retail and data centre needs. With appointment to the HSBC framework and a widened remit with the Royal Bank of Scotland, retail banking remains a priority growth sector.

Major project wins during the year include the appointment by the Industrial and Commercial Bank of China to fit out its UK headquarters in London. This is the second of China's prominent 'big four' banks to appoint Fit Out, following the successful delivery of the large-scale fit out for Bank of China's London headquarters.

An exemplar project for the division has been the completion of the fit out of prestigious new offices for Macquarie Bank in London under a pioneering best practice alliance contract, encouraging close collaboration between the client and the project team.

At MediaCityUK in Salford Quays, Manchester, the division has completed two major projects. The £18m fit out of the University of Salford's new 100,000 sq ft facility, converting office space into a digital learning, teaching and research centre and the major fit out of the BBC's high profile facilities, delivering one of the UK's first 'activity-based working' concept designs.

Stable outlook

The London office market is not expected to grow in the short term, constrained by lack of Grade A space, developers unable to access finance and subdued occupier sentiment. Current conditions will be mitigated in part by the division's growth in technology and retail banking projects and its continuing successful focus on the resilient sub-£1m market. However, the economic environment is resulting in increasing levels of mergers, demergers and acquisitions which inevitably lead to space rationalisation, generating opportunities for fit out and refurbishment. The market is expected to improve from 2013 due to a substantial increase in lease expiries across the country and preparations are already underway to enable the division to capitalise from this expected wave of new opportunities.

The division's order book currently stands at £216m (2010: £180m) which underpins a stable outlook for 2012. It will continue to focus on the growing technology and retail banking sectors and anticipates expanding its track record within the education sector, working with universities under pressure to improve their facilities to attract students. Another area of anticipated growth is through collaboration with Construction and Infrastructure to offer a fully integrated fit out and construction service.

AFFORDABLE HOUSING

Our Affordable Housing division, operating as Lovell, specialises in the design and build, refurbishment, maintenance, regeneration and repair of homes and communities across the UK.  The division operates a full mixed tenure model creating homes for rent, shared ownership and open market sale.

	2011	2010	Change
Revenue	£462m	£387m	+19%
Operating profit*	£18.5m	£16.1m	+15%
Margin	4.0%	4.2%
Forward order book	£1.5bn	£1.5bn	n/c

2011 growth reflects broader offering

Revenue was significantly increased at £462m (2010: £387m) which reflects a full year of the enlarged business following the Connaught acquisition. Operating profit* increased to £18.5m (2010: £16.1m) with the margin firm at 4.0% (2010: 4.2%).

House sales are continuing to be constrained by the lack of mortgage availability and the division's shared equity offering is continuing to support sales, in particular to first-time buyers. On a small number of sites Lovell has retained some completed properties for rental in order to maintain momentum and contribute to the success of the overall regeneration project. With the public sector experiencing the impact of the Government's Comprehensive Spending Review, Lovell has honed its business to adapt to market conditions and to respond to opportunities.

The division has achieved an improved result in 2011, further reinforcing its market-leading position. Working under development agreements with local authority landowners enables the division to access land, avoiding the risk associated with acquiring land on the open market and in the majority of cases allowing Lovell to draw down plots of land at optimum times. The division's strategy of working in partnership with housing associations enables it to build affordable housing under contract alongside units for open market sale, providing the business with a stream of income and reducing its reliance on private sales. Lovell's Service First ethos is providing clients with a quality product and a way of working which is setting new standards and achieving high levels of customer satisfaction.

The full year impact of the division's enhanced capability to provide response maintenance services has resulted in significant revenue growth. It has added an extra layer of resilience to the business and provided a substantial revenue stream less directly dependent on Government funding decisions and with considerable growth potential. 

Major new projects secured

A real highlight for Lovell has been the successful integration of the acquired Connaught business. Investment has been made in a wide range of technical and health and safety training initiatives and installation of new business systems allowing the division to swiftly convert opportunities from its strengthened service offering. Such opportunities include an agreement with Barnet Homes, worth approximately £103m over ten years, to deliver planned refurbishment and electrical work across the London Borough of Barnet's portfolio of 15,000 homes.

At Miles Platting, Lovell is successfully completing the transformation of 264 acres of an inner city housing estate into a sustainable mixed-tenure urban environment delivered through a Private Finance Initiative. Over 1,500 homes have been refurbished and over 1,000 new homes are to be built over the next ten years.

Compendium Living, the joint venture between Lovell and one of the UK's largest Registered Providers, the Riverside Group, has recently entered into a £100m agreement with Derby City Council, to regenerate a 30-acre brownfield site with 800 new homes, a new school and community facilities.

The division has been appointed by Birmingham City Council to the £3bn Constructing West Midlands framework working alongside the Construction and Infrastructure division, under the name Community Solutions West Midlands, demonstrating the synergy and value produced by the Group's divisions working together. An additional framework win has been the selection of Lovell by Efficiency North on its £975m framework for 15 social housing providers to improve the homes and communities across Yorkshire and the Humber region.

Housing-led regeneration

The division is also working alongside its Urban Regeneration colleagues on the £300m Northshore project in Stockton, and in the first phase of the project, Lovell is delivering 50 energy-efficient affordable houses for open market sale.

In London, 63 high quality homes have been delivered by the division as part of a £17m mixed-use regeneration development in Clapham, working with Morgan Sindall for Cathedral Group and Notting Hill Housing Group. Lovell has also won repeat business with the London Borough of Hackney with the award of a £25m contract to build two new sustainable housing schemes through a groundbreaking land swap scheme. This award follows extensive work on the Borough's housing modernisation programme over the past six years.

Public sector land driving mixed-tenure opportunities

Lovell's forward order book is steady at £1.5bn (2010: £1.5bn). Despite the ongoing economic uncertainty, there is still strong market demand for the services that Lovell offers. The requirement for new mixed-tenure affordable housing, an extensive ageing local authority and housing association stock in need of refurbishment and a requirement for responsive and emergency maintenance of public sector-owned homes all lie within the division's proven areas of expertise. In addition the release of public sector land for housing will help drive mixed-tenure regeneration opportunities.

The tendering market is expected to remain competitive but it expects its full service offering will continue to give the business a distinct competitive advantage with the increasing number of packaged work tenders which require the full service capability.

URBAN REGENERATION

Our Urban Regeneration division, operating as Muse, specialises in working with landowners and public sector partners to unlock value from under-developed assets to bring about sustainable regeneration and urban renewal through the delivery of mixed-use projects typically creating commercial, retail, residential, leisure and public realm facilities.

	2011	2010	Change
Revenue	£57m	£46m	+24%
Operating profit*	£3.9m	£2.0m	+95%
Margin	6.9%	4.4%
Regeneration pipeline	£1.6bn	£1.4bn	+14%

2011 profit almost doubles

Despite tough market conditions, Muse had a successful year with a growing operating profit* and marked increase in on-site activity. New construction contracts with a value of £36m were let during 2011 and by the end of the year, construction contracts with a total value of £97m were on-site. The division has contributed significantly to the Group's results delivering an increased operating profit* of £3.9m (2010: £2.0m) on revenue of £57m (2010: £46m). It has also grown its regeneration pipeline substantially, with its share standing at £1.6bn with a further £0.6bn of opportunities currently at preferred developer status.

Muse's profit comes from a range of sources including active development, value-enhancing land trading and development management fees. Spread across the country, this mix avoids reliance on one particular source of income and provides a level of resilience to shifting market and economic conditions.

£0.8bn of major new schemes secured

Current market conditions have enabled Muse to work to its strengths. Namely its strong partnership record, proven expertise and its determination to identify solutions to overcome barriers to success. This reputation is further enhanced by the strong financial backing of the Group and its commitment to regeneration.

With many competitors less active in the market, the division has capitalised on opportunities throughout 2011. Significant achievements include being appointed by Rolls Royce as its development partner for a mixed-use development worth up to £250m on 150 acres of surplus land adjacent to one of its production facilities in the Midlands. In Chester a new development agreement was concluded with Lloyds Banking Group and Muse achieved preferred developer status on three schemes in Warrington, Basingstoke and Stockport. Development agreements are expected to be reached on these schemes within the first half of 2012. Other critical project milestones have been reached, including securing outline and detailed planning approvals on phases within eight major schemes throughout the country.

Warrington Borough Council selected Muse as preferred developer for the £130m Bridge Street Quarter regeneration scheme. One of the largest regeneration projects in the region, the scheme is the first phase of the council's 25-year strategic masterplan for the town centre and waterfront area and will provide retail, leisure and new offices for the council.

Stockport Metropolitan Borough Council has chosen the division as its preferred development partner for Grand Central, a £140m key gateway site. The project will deliver a high quality office quarter with quality public realm and easy access to the town centre, supported by a hotel and improved car parking.

Muse has also been named as Basingstoke and Deane Borough Council's partner for a £200m regeneration project, working with the council to develop in excess of 700,000 sq ft on council-owned sites. The scheme will include a mix of office space, a hotel and other supporting facilities.

In Chester the division acquired a 3.5 acre site from Lloyds Banking Group in order to unlock the plans for a new Business Quarter scheme providing 500,000 sq ft of prime office space in the city centre.

Progressing existing schemes

Despite withdrawal of regional development agency funding, Muse is taking forward the £220m Talbot Gateway scheme in Blackpool. The scheme will create 1.1m sq ft of new retail, commercial, community and residential space as well as parking and a new transport interchange. A detailed planning application has been submitted for the first phase and a pre-sale agreement has been exchanged with Sainsbury's for a large format store.

In Doncaster work is progressing on the £300m Civil and Cultural Quarter, set to breathe new life into the town centre. Working within an innovative asset-backed vehicle with Doncaster Council, the latest phase of construction has commenced to deliver a £20m theatre.

The English Cities Fund, a Muse joint venture, celebrated the completion of the final phase of the St Paul's Square scheme in Liverpool with the opening of No 4 St Paul's Square. The £32m building provides a total of 109,000 sq ft of high quality Grade A office space over eight floors and is the focal point for Liverpool's central business district.

In Scotland, at the 650-acre Eurocentral business park development, the division took advantage of positive investor demand to forward sell over 200,000 sq ft of speculative distribution units for £33m.

Muse continues to provide opportunities for other Group divisions, working with Construction and Infrastructure in Doncaster and Wakefield. At its Northshore development in Stockton, the first phase of the £300m housing and regeneration scheme is underway with Lovell providing 50 energy-efficient affordable houses for open market sale. 

Further progress expected in 2012

Despite the regeneration market's ongoing challenges, Muse's significant development pipeline and its successful track record allows the division to be confident that it has good visibility of where it will be able to extend its level of contribution to the Group's financial results.

Muse is confident that its business model will continue to allow it to capitalise on its regeneration expertise working within development agreements, partnering with landowners and its existing strategic vehicles and to maximise public sector, residential, retail and leisure opportunities. 

INVESTMENTS

Our Investments division, operating as MSIL, facilitates project development, primarily in the public sector, by providing flexible financing solutions and development expertise covering a wide range of markets including urban regeneration, education, healthcare, housing, emergency services, defence and infrastructure. 

	2011	2010	Change
Directors' portfolio valuation	£49m	£41m	+20%
Operating result*	(£3.9m)	(£3.3m)	-18%
Regeneration pipeline	£179m	-

2011 growth in portfolio value

The directors' valuation of the investment portfolio has increased to £49m (2010: £41m). 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% to 9% (post tax). The valuation of this portfolio is based on discounting expected future cash flows but does not include potential refinancing gains or projects at preferred bidder stage or profit made by Investments from providing services or profit made by other parts of the Group that perform the construction, maintenance or facilities management work.

Against the backdrop of a challenging economic environment, 2011 has seen Investments achieve considerable success. The operating result* was a net cost after joint venture income of £3.9m (2010: £3.3m) which reflects the costs associated with public sector procurement, managing the portfolio and also the creation of vehicles required for funding initiatives. This is mitigated by the division's success in creating value for the Group through enabling other divisions to access a broad range of work and through its investment portfolio which increased in value significantly during the year.

Major schemes progress

Highlights include reaching agreement on significant urban regeneration schemes, securing financial closure and delivering landmark community projects. Formal contracts have been signed on the Bournemouth Town Centre Vision LABV scheme, a 20-year project with a development value in excess of £500m. The scheme is a 50/50 joint venture public private partnership between Bournemouth Borough Council and Investments. The scheme is a prime example of public sector land being released to drive regeneration. It will deliver a range of residential and mixed-use development and the regeneration of under-utilised council assets will enable significant investment in the public realm. The Group's Construction and Infrastructure and Affordable Housing divisions will provide construction services once planning is secured and work commences on the first site in early 2012.

Three additional contracts, totalling £65m, were awarded to Construction and Infrastructure as part of Hull City Council's Building Schools for the Future (BSF) programme. The contracts were awarded following financial closure by an Investments' consortium that has formed a Local Education Partnership with Hull City Council and Partnerships for Schools to deliver the BSF programme.

The opening of the £38m Basildon Sporting Village demonstrates the Group's integrated expertise in funding, designing and building community leisure facilities through public private partnerships. The largest sports project in the Thames Gateway was delivered on time and on budget through a 25-year agreement between Investments and Basildon Borough Council. The world-class facilities will act as a community hub, a county and regional sporting venue and an international training venue for the 2012 Olympics and Paralympics.

Wigan Life Centre, a £50m national award-winning leisure, health, learning and information complex was completed and is fully operational, delivered via a 25-year public private agreement between Wigan Metropolitan Borough Council, Community Solutions for Leisure and Hochtief PPP Solutions (UK). Construction and Infrastructure provided a wide range of construction services.

Community Solutions, the health and social care joint venture with Barclays Infrastructure Funds, further strengthened its presence in the NHS Local Improvement Finance Trust (LIFT) market this year through the acquisition of Primary Plus Limited. This acquisition, in addition to its investment activity, makes Community Solutions one of the largest management services provider in the LIFT market. It creates new partnerships with NHS and public sector organisations and will help secure new activity across the health and social care markets.

Partnership with the public sector

2012 will see Investments maintaining its strategy of identifying projects that offer the most potential to the Group and increase the value of its investment portfolio. With ongoing constraints on the public purse, local authorities will continue to seek viable public/private vehicles that facilitate development, secure efficiencies and boost economic growth. Investment options are also being explored around the infrastructure needs of the renewable energy industry where the Group's integrated offering and experience can add significant value.

Subsequent to the year end the division sold its investment in Dorset Fire & Rescue PFI for £3.8m, which was above the directors' valuation at 31 December 2011. This represents a discount rate on the directors' valuation cashflows of 7%. This is consistent with the policy to realise investments from time to time in order to recycle capital into new opportunities.

FINANCE REVIEW

Resilient 2011 performance

	2011	2010
Revenue	£2,227m	£2,102m
Operating profit*	£46.1m	£52.4m
Profit before tax, amortisation and non-recurring items	£45.3m	£51.3m
Profit before tax	£40.0m	£40.7m
Year end cash balance	£109m	£149m

Where stated, operating profit is profit from operations before amortisation and non-recurring items.

Overview

The difficult macroeconomic environment has persisted throughout 2011 and looks set to continue through 2012. Nevertheless, the Group has delivered resilient results and has delivered improved returns from regeneration activities. The Group continues to shape its businesses to address changing markets and, while there have been no material acquisitions in the year, the Connaught and Powerminster acquisitions in 2010 have been fully integrated and the merged Construction and Infrastructure businesses are now operating as one division. The Group continues to address its cost base, and further action will continue to be taken as necessary.

Revenue of £2,227m and operating profit* of £46.1m

Revenue has risen by 6% to £2,227m (2010: £2,102m), with revenue rises across both construction and regeneration activities of £18m in Construction and Infrastructure, £75m in Affordable Housing, £23m in Fit Out and £11m in Urban Regeneration.

Operating profit* has fallen by £6.3m to £46.1m (2010: £52.4m), with decreases in Construction and Infrastructure (£5.8m), and Fit Out (£2.4m) due to market pressure on margin, offset by increases in Affordable Housing (£2.4m) and Urban Regeneration (£1.9m). The Investments division incurred an operating loss of £3.9m (2010: £3.3m) and the cost of Group activities rose by £1.8m to £5.9m due to increased investment in IT and 2010 benefiting from the release of some historic cost accruals that were no longer required.

Margin across our construction activities fell, reflecting continuing strong competition for work and lower returns available in these markets. Margin fell to 1.7% (2010: 2.2%) in Construction and Infrastructure, to 4.0% (2010: 4.2%) in Affordable Housing and to 2.8% (2010: 3.6%) in Fit Out.

Net finance expense of £0.8m

The net finance expense of £0.8m (2010: £1.1m) has reduced due to the release of an unutilised provision for interest payable to HMRC following the resolution of discussions with HMRC over corporation tax matters arising following the Amec acquisition in 2007. This is offset by lower finance income due principally to lower average cash balances in the year of £23m (2010: £63m).

Overall, profit before tax, amortisation and non-recurring items fell by £6.0m to £45.3m (2010: £51.3m). Amortisation of intangible assets in the year was £3.9m (2010: £5.5m) and non-recurring costs of IT integration following the 2010 merger of the Construction and Infrastructure Services divisions were £1.4m (2010: £5.1m).

Tax

The Group's tax charge of £7.2m (2010: £10.9m) represents an effective tax rate of 18.0% (2010: 26.8%), significantly lower than the standard rate of corporation tax. The low effective tax rate arises primarily as a result of non-recurring prior year adjustments of £2.8m (7.0%) reflecting the resolution of discussions with HMRC over corporation tax matters following the Amec acquisition in 2007 as set out in note 5 to the accounts. Adjusting for this effect and other one-off prior year adjustments gives an underlying effective tax rate of 26.3% (2010: 29.0%).

Earnings per share

Adjusted basic earnings per share before amortisation and non-recurring items have fallen by 11% from 92.9p to 82.5p, reflecting the fall in adjusted profit before tax offset by the decrease in the effective tax rate. Basic earnings per share have risen by 10% from 70.5p to 77.5p.

Group has substantial year end cash balances

The cash position of the Group at the year end was robust at £109m (2010: £149m). Average cash during 2010 decreased to £23m (2010: £63m) reflecting increased investment in our regeneration activities and increases in shared equity and investment property balances.

The net cash outflow from operating activities was £11.8m (2010: inflow of £90.6m). This is primarily the result of the working capital outflow of £51.6m (2010: inflow of £53.7m). This mainly reflects the particularly strong cash performance at the 2010 year end, which was expected to unwind in 2011. Additionally, the Group has £17.6m (2010: £13.9m) of shared equity receivables relating to open market sales in the Affordable Housing and Urban Regeneration divisions and £7.0m (2010: £2.5m) of investment properties, rented in order to maintain momentum on a small number of regeneration schemes. There were small net payments of £0.4m (2010: £35.2m) for acquisitions, capital expenditure was £5.4m (2010: £2.8m) and payments to increase interests in joint ventures were £6.0m (2010: £4.3m), all of which reflect ongoing investment in the business. Cash dividends of £0.3m (2010: £0.8m) were received from joint ventures. After tax payments, dividends and servicing of finance, the net decrease in cash and cash equivalents was £39.7m (2010: £30.9m increase).

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.

Capital management

The Board intends to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the Group. There were no changes in the Group's approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.

The Group is financed by equity, with committed banking facilities available to draw on to fund shorter term movements in working capital. The Group is not particularly capital intensive, hence investment in fixed assets is relatively low, and has reduced in the year, as have assets financed by finance leases. The Group is seeking increasingly to invest cash generated by its construction activities in long-term regeneration projects that themselves can lead to construction opportunities for the Group. Some of these regeneration projects will be carried out in joint venture and will be funded in part by Group resources but will largely draw on non-recourse debt finance. The Group has a very small defined benefit pension plan (£1.3m deficit on £9.4m of gross liabilities) that is closed to new members or further accruals.

Banking facilities committed until 2015

In the period, the Group refinanced its banking facilities and now has £100m of committed banking facilities through to September 2015 with a further £25m in place to June 2012. The banking facilities are subject to financial covenants, all of which have been met throughout the year. These committed facilities supplement the cash balances in providing financial security to the Group.

Dividend

The Board recommends a final dividend of 30.0p payable on 18 May 2012 to shareholders on the register at the close of business on 27 April 2012. This will give a total dividend for the year maintained at 42.0p (2010: 42.0p). This is covered by adjusted earnings per share 2.0 times (2010: 2.2 times). 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. Although the cover has reduced to 2.0 times, the Board is comfortable with this as the dividend is covered by current profits and can be met from existing financial resources. The Group will seek to re-establish the longer-term level of cover as and when profits increase.

Continuing balance sheet strength

Total equity increased to £235.6m (2010: £221.7m). The number of shares in issue at 31 December 2011 was 43.2m (2010: 43.2m). A small increase of 27,019 shares resulted from the exercise of options under employee share option schemes.

In the course of the year, fair values relating to the 2010 acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited were finalised. This led to further adjustments of £1.1m, with goodwill recognised on acquisition increasing by an equivalent amount. Additionally, the Group acquired the investment of its partner in a joint venture for a consideration of £0.4m, leading to a decrease in goodwill of £0.2m and an increase to intangible assets of £0.2m. During the year the Group signed strategic supply agreements with its general plant and site accommodation suppliers that led to the transfer of existing plant and equipment to them as part of the agreement. This largely contributed to a fall in the overall fixed assets deployed in the business of £6.8m.

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 restricted to 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, but committed foreign exchange exposures are hedged as and when they arise.

Some of the Group's joint venture businesses use interest rate swaps to hedge floating interest rate exposures and Retail Prices Index swaps to hedge inflation exposure. In the course of the year a construction joint venture, in which the Group participates, entered into foreign exchange contracts in order to hedge foreign exchange exposures on the provision of construction services. The Group considers that its exposure to interest rate, foreign exchange and inflation movements is appropriately managed.

In the normal course of its business, the Group arranges for financial institutions to provide customers guarantees ('bonds') to provide some financial protection in the event a contractor fails to meet its commitments under the terms of a contract. The Group pays a fee and provides a counter-indemnity to the financial institutions for issuing the bonds. As at 31 December 2011, contract bonds in issue under uncommitted facilities covered £204.1m (2010: £171.8m) of contract commitments of the Group.

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 capital management policy, its cash flows, liquidity position and borrowing facilities are also described above.

As at 31 December 2011, the Group had cash of £109m and committed banking facilities of £100m extending to September 2015 with a further £25m in place to June 2012.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its available 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.

Consolidated income statement

For the year ended 31 December 2011

			2011	2010
		Notes	£m	£m
Continuing operations
Revenue		4	2,226.6	2,101.9
Cost of sales			(2,010.9)	(1,884.7)
Gross profit			215.7	217.2
Amortisation of intangible assets		4	(3.9)	(5.5)
Non-recurring items		4	(1.4)	(5.1)
Other administrative expenses			(170.3)	(165.2)
Total administrative expenses			(175.6)	(175.8)
Share of net profit of equity accounted joint ventures		4	0.3	0.1
Other gains and losses			0.4	0.3
Profit from operations		4	40.8	41.8
Finance income			1.6	1.7
Finance costs			(2.4)	(2.8)
Net finance expense			(0.8)	(1.1)
Profit before income tax expense		4	40.0	40.7
Income tax expense		5	(7.2)	(10.9)
Profit for the year			32.8	29.8
Attributable to:
Owners of the Company			32.9	29.9
Non-controlling interests			(0.1)	(0.1)
			32.8	29.8
Earnings per share
From continuing operations:
Basic		7	77.5p	70.5p
Diluted		7	76.5p	69.7p

There were no discontinued operations in either the current or comparative year.

Consolidated statement of comprehensive income

For the year ended 31 December 2011

		2011	2010
		£m	£m
Profit for the year		32.8	29.8
Other comprehensive income/(expense):
Actuarial gain arising on defined benefit obligation		-	0.8
Deferred tax on defined benefit obligation		(0.1)	(0.3)
Movement on cash flow hedges in equity accounted joint ventures		(0.7)	(1.4)
Other movement on cash flow hedges		(0.2)	-
Other comprehensive expense for the year, net of income tax		(1.0)	(0.9)
Total comprehensive income for the year		31.8	28.9
Attributable to:
Owners of the Company		31.9	29.0
Non-controlling interests		(0.1)	(0.1)
		31.8	28.9

Consolidated balance sheet

At 31 December 2011

				Restated
			2011	2010
			£m	£m
Non-current assets
Goodwill			214.1	214.3
Other intangible assets			12.5	16.6
Property, plant and equipment			21.6	27.8
Investment property			11.1	4.3
Investments in equity accounted joint ventures			49.8	45.4
Investments			0.4	0.1
Shared equity loan receivables			17.6	13.9
Deferred tax assets			-	3.2
			327.1	325.6
Current assets
Inventories			146.0	141.1
Amounts due from construction contract customers			228.6	178.4
Trade and other receivables			186.5	229.2
Cash and cash equivalents			108.9	148.6
			670.0	697.3
Total assets			997.1	1,022.9
Current liabilities
Trade and other payables			(620.9)	(667.2)
Amounts due to construction contract customers			(78.8)	(70.7)
Current tax liabilities			(8.7)	(30.6)
Finance lease liabilities			(0.8)	(1.7)
Provisions			(4.6)	(7.7)
			(713.8)	(777.9)
Net current liabilities			(43.8)	(80.6)
Non-current liabilities
Trade and other payables			(0.3)	-
Finance lease liabilities			(4.3)	(6.0)
Retirement benefit obligation			(1.3)	(1.9)
Deferred tax liabilities			(19.8)	-
Provisions			(22.0)	(15.4)
			(47.7)	(23.3)
Total liabilities			(761.5)	(801.2)
Net assets			235.6	221.7
Equity
Share capital			2.2	2.2
Share premium account			26.7	26.7
Capital redemption reserve			0.6	0.6
Own shares			(5.8)	(5.9)
Hedging reserve			(4.0)	(3.1)
Retained earnings			216.2	201.4
Equity attributable to owners of the Company			235.9	221.9
Non-controlling interests			(0.3)	(0.2)
Total equity			235.6	221.7

In the course of the year, fair values on an acquisition in 2010 were finalised, leading to a restatement of the 2010 comparative balance sheet.  Details are included in note 11.

Consolidated cash flow statement (unaudited)

For the year ended 31 December 2011

			2011	2010
		Notes	£m	£m
Net cash (outflow)/inflow from operating activities		8	(11.8)	90.6
Cash flows from investing activities
Interest received			1.4	1.9
Dividend from joint ventures			0.3	0.8
Proceeds on disposal of property, plant and equipment			4.6	1.1
Purchases of property, plant and equipment			(5.4)	(2.8)
Payments to acquire interests in joint ventures			(6.0)	(4.3)
Payment to acquire other investment			(0.3)	-
Payment for the acquisition of subsidiaries and other businesses			(0.4)	(35.2)
Net cash outflow from investing activities			(5.8)	(38.5)
Cash flows from financing activities
Dividends paid			(17.8)	(17.8)
Repayments of obligations under finance leases			(4.3)	(3.4)
Net cash outflow from financing activities			(22.1)	(21.2)
Net (decrease)/increase in cash and cash equivalents			(39.7)	30.9
Cash and cash equivalents at the beginning of the year			148.6	117.7
Cash and cash equivalents at the end of the year
Bank balances and cash			108.9	148.6

Consolidated statement of changes in equity (unaudited)

For the year ended 31 December 2011

	Attributable to owners of the Company
	Share capital	Share premium account	Capital redemption reserve	Reserve for own shares held	Hedging reserve	Retained earnings	Total	Non-controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2010	2.2	26.7	0.6	(6.0)	(1.7)	187.6	209.4	(0.1)	209.3
Total comprehensive income for the year:
Net profit	-	-	-	-	-	29.9	29.9	(0.1)	29.8
Other comprehensive income:
Actuarial gain arising on defined benefit obligation	-	-	-	-	-	0.8	0.8	-	0.8
Deferred tax on defined benefit obligation	-	-	-	-	-	(0.3)	(0.3)	-	(0.3)
Movement on cash flow hedges in equity accounted joint ventures	-	-	-	-	(1.4)	-	(1.4)	-	(1.4)
Total comprehensive income for the year, net of income tax	-	-	-	-	(1.4)	30.4	29.0	(0.1)	28.9
Share-based payments	-	-	-	-	-	0.7	0.7	-	0.7
Exercise of share options	-	-	-	0.1	-	(0.1)	-	-	-
Movement on deferred tax asset on share-based payments	-	-	-	-	-	0.6	0.6	-	0.6
Own shares acquired in the year	-	-	-	-	-	-	-	-	-
Dividends paid:
Final dividend for 2009	-	-	-	-	-	(12.7)	(12.7)	-	(12.7)
Interim dividend for 2010	-	-	-	-	-	(5.1)	(5.1)	-	(5.1)
Balance at 31 December 2010	2.2	26.7	0.6	(5.9)	(3.1)	201.4	221.9	(0.2)	221.7
Balance at 1 January 2011	2.2	26.7	0.6	(5.9)	(3.1)	201.4	221.9	(0.2)	221.7
Total comprehensive income for the year:
Net profit	-	-	-	-	-	32.9	32.9	(0.1)	32.8
Other comprehensive income:	-	-	-	-	-	-	-	-	-
Actuarial gain arising on defined benefit obligation	-	-	-	-	-	-	-	-	-
Deferred tax on defined benefit obligation	-	-	-	-	-	(0.1)	(0.1)	-	(0.1)
Movement on cash flow hedges in equity accounted joint ventures	-	-	-	-	(0.7)	-	(0.7)	-	(0.7)
Other movement on cash flow hedges	-	-	-	-	(0.2)	-	(0.2)	-	(0.2)
Total comprehensive income for the year, net of income tax	-	-	-	-	(0.9)	32.8	31.9	(0.1)	31.8
Share-based payments	-	-	-	-	-	0.5	0.5	-	0.5
Exercise of share options	-	-	-	0.1	-	(0.1)	-	-	-
Movement on deferred tax asset on share-based payments	-	-	-	-	-	(0.6)	(0.6)	-	(0.6)
Own shares acquired in the year	-	-	-	-	-	-	-	-	-
Dividends paid:
Second interim dividend for 2010	-	-	-	-	-	(12.7)	(12.7)	-	(12.7)
Interim dividend for 2011	-	-	-	-	-	(5.1)	(5.1)	-	(5.1)
Balance at 31 December 2011	2.2	26.7	0.6	(5.8)	(4.0)	216.2	235.9	(0.3)	235.6

Notes

For the year ended 31 December 2011

1 General information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2011 or 2010 but is derived from those accounts. Statutory accounts for 2010have been delivered to the Registrar of Companies and those for 2011 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unmodified, did not draw attention to any matters by way of emphasis without modifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

          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.

          While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to 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 2011 that comply with IFRS available on the Company's website on or about 23 March 2012. If a shareholder has requested to continue to receive a hard copy of the annual report and accounts they will be posted on or about 22 March 2012. 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 announcement and in the Group's annual report and accounts for the year ended 31 December 2011. 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 2010 and the period to 30 June 2011.

Accounting for construction and service contracts

Recognition of revenue and margin is based on judgments made in respect of the ultimate profitability of a contract.  Such judgments are arrived at through the use of estimates in relation to the costs and value of work performed to date and to be performed in bringing contracts to completion, including satisfaction of maintenance responsibilities.  These estimates are made by reference to recovery of pre-contract costs, surveys of progress against the construction programme, changes in work scope, the contractual terms under which the work is being performed, including the recoverability of any unagreed income from variations and the likely outcome of discussions on claims, costs incurred and external certification of the work performed.  The Group has appropriate control procedures to ensure all estimates are determined on a consistent basis and subject to appropriate review and authorisation.

Revenue comprises the fair value of construction carried out in the year based on an internal assessment of work carried out.  Once the outcome of a construction contract can be estimated reliably, margin is recognised in the income statement on a stage of contract completion basis by reference to costs incurred to date and total forecast costs on the contract as a whole.  Losses expected in bringing a contract to completion are recognised immediately in the income statement as soon as they are forecast.  Where the outcome of variations is uncertain, the Group only recognises revenue and associated margin where it is probable that the client will approve the variation.  Where the outcome of claims is uncertain, the Group only recognises revenue when negotiations have reached an advanced stage such that it is probable that the customer will accept the claim.

4 Business segments

For management purposes, the Group is organised into five operating divisions: Construction and Infrastructure, Fit Out, Affordable Housing, Urban Regeneration and Investments. The divisions' activities are as follows:

·    Construction and Infrastructure: offers national design, construction and infrastructure services to private and public sector customers.  The division works on projects of all sizes across a broad range of sectors including commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport, waste and water;

·    Fit Out: specialises in fit out and refurbishment projects in the office, education, retail, technology and leisure sectors through Overbury as a national fit out company operating through multiple procurement routes and Morgan Lovell specialising in the design and build of offices in London and the South;

·    Affordable Housing: specialises in the design and build, refurbishment, maintenance, regeneration and repair of homes and communities across the UK.  The division operates a full mixed tenure model creating homes for rent, shared ownership and open market sale;

·    Urban Regeneration: specialises in working with landowners and public sector partners to unlock value from under-developed assets to bring about sustainable regeneration and urban renewal through the delivery of mixed-use projects typically creating commercial, retail, residential, leisure and public realm facilities; and

·    Investments: facilitates project development, primarily in the public sector, by providing flexible financing solutions and development expertise covering a wide range of markets including urban regeneration, education, healthcare, housing, emergency services, defence and infrastructure

Group Activities represents costs and income arising from corporate activities which cannot be allocated to the operating segments. These include costs for central activities such as treasury management, corporate tax coordination, insurance management, pension administration and company secretarial and legal services. The divisions are the basis on which the Group reports its segment information. Segment information about the Group's continuing operations is presented below:

2011
	Construction and Infrastructure	Fit Out	Affordable Housing	Urban Regeneration	Investments	Group Activities		Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue: external	1,267.8	438.0	462.3	56.6	1.9	-	2,226.6	-	2,226.6
Revenue: inter-segment	0.2	7.0	3.2	-	-	-	10.4	(10.4)	-
Included in profit/(loss) below:
Share of results of associates and joint ventures after tax	-	-	(0.1)	(1.2)	1.6	-	0.3	-	0.3
Profit/(loss) from operations before amortisation and non-recurring items	21.1	12.4	18.5	3.9	(3.9)	(5.9)	46.1	-	46.1
Amortisation of intangible assets	-	-	(0.9)	(3.0)	-	-	(3.9)	-	(3.9)
Non-recurring items	(1.4)	-	-	-	-	-	(1.4)	-	(1.4)
Profit/(loss) from operations	19.7	12.4	17.6	0.9	(3.9)	(5.9)	40.8	-	40.8
Net finance expense							(0.8)		(0.8)
Profit before income tax expense							40.0		40.0

2010
	Construction and Infrastructure	Fit Out	Affordable Housing	Urban Regeneration	Investments	Group Activities		Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue: external	1,249.8	415.1	387.3	45.8	3.9	-	2,101.9	-	2,101.9
Revenue: inter-segment	49.6	3.5	2.2	-	-	-	55.3	(55.3)	-
Included in profit/(loss) below:
Share of results of associates and joint ventures after tax	-	-	(0.2)	(0.5)	0.8	-	0.1	-	0.1
Profit/(loss) from operations before amortisation and non-recurring items	26.9	14.8	16.1	2.0	(3.3)	(4.1)	52.4	-	52.4
Amortisation of intangible assets	(0.5)	-	(0.3)	(4.7)	-	-	(5.5)	-	(5.5)
Non-recurring items	(3.2)	-	(3.9)	2.0	-	-	(5.1)	-	(5.1)
Profit/(loss) from operations	23.2	14.8	11.9	(0.7)	(3.3)	(4.1)	41.8	-	41.8
Net finance expense							(1.1)		(1.1)
Profit before income tax expense							40.7		40.7

5 Income tax expense

			2011	2010
Current tax expense:			£m	£m
UK corporation tax			10.0	11.7
Adjustment in respect of prior years as set out below			(25.1)	(1.4)
			(15.1)	10.3
Deferred tax expense:
Current year			(1.0)	0.1
Adjustment in respect of prior years as set out below			23.3	0.5
			22.3	0.6
Income tax expense for the year			7.2	10.9

	2011	2010
Current tax expense:	£m	£m
Profit before tax	40.0	40.7
UK corporation tax rate	26.5%	28.0%
Income tax expense at UK corporation tax rate	10.6	11.4
Tax effect of:
Expenses that are not deductible in determining taxable profits	0.3	0.8
Agreement with HMRC (see below)	(2.8)	-
Other adjustments in respect of prior years	(0.5)	(0.9)
Other effect of expected forthcoming change in tax rates upon closing deferred tax balance	(0.1)	0.1
Other	(0.3)	(0.5)
Income tax expense for the year	7.2	10.9
Effective tax rate for the year	18.0%	26.8%
Effective tax rate for the year ignoring prior year adjustments	26.3%	29.0%

During the year the Group resolved its discussions with HMRC concerning corporation tax matters arising following the acquisition of certain businesses and assets from Amec in 2007. This agreement with HMRC resulted in a significant deferral of the Group's tax liabilities. This agreement is shown in the figures above through a reduction in current tax liabilities of £21.9m, shown as prior year adjustments, offset by an increase in deferred tax liabilities of £19.1m (calculated at 25% tax rate), mainly shown as prior year adjustments. The net effect, a £2.8m reduction in the tax charge, is due to reductions in UK corporation tax rates since 2007, as the release of provisions for current taxation is calculated using higher tax rates than the 25% tax rate used for calculation of the closing 2011 deferred tax balances.

6 Dividends

Amounts recognised as distributions to equity holders in the year:
		2011	2010
		£m	£m
Second interim dividend for the year ended 31 December 2010 of 30.0p (2009: second interim dividend 30.0p) per share		12.7	12.7
Interim dividend for the year ended 31 December 2011 of 12.0p (2010: 12.0p) per share		5.1	5.1
		17.8	17.8
Proposed dividend:
		£m	£m
Proposed final dividend for the year ended 31 December 2011 of 30.0p (2010: second interim dividend of 30.0p) per share		12.8	12.8

The proposed final dividend of 30.0p (2010: second interim dividend of 30.0p) per share is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. The proposed final dividend will be paid on 18 May 2012 to shareholders on the register at 27 April 2012. The ex-dividend date will be 25 April 2012.

7 Earnings per share

There are no discontinued operations in either the current or comparative years.

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

		2011	2010
Earnings	Notes	£m	£m
Earnings before tax		40.0	40.7
Deduct tax expense per the income statement	5	(7.2)	(10.9)
Non-controlling interests		0.1	0.1
Earnings for the purposes of basic and dilutive earnings per share being net profit attributable to owners of the Company		32.9	29.9
Add back:
amortisation expense		3.9	5.5
non-recurring items after tax		1.0	4.0
Deduct:
non recurring credit to tax charge	5	(2.8)	-
Earnings for the purposes of adjusted basic and dilutive earnings per share being net profit attributable to owners of the Company adjusted for amortisation expense and non-recurring items		35.0	39.4
		2011	2010
Number of shares		No. '000s	No. '000s
Weighted average number of ordinary shares for the purposes of basic earnings per share		42,442	42,391
Effect of dilutive potential ordinary shares:
Share options		204	93
Conditional shares not vested		357	389
Weighted average number of ordinary shares for the purposes of diluted earnings per share		43,003	42,873

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 £6.30 (2010: £5.93).

Earnings per share as calculated in accordance with IAS 33, 'Earnings per Share' are disclosed below:

			2011	2010
Basic earnings per share			77.5p	70.5p
Diluted earnings per share			76.5p	69.7p
Earnings per share adjusted for amortisation expense and non-recurring items:
			2011	2010
Basic earnings per share adjusted for amortisation expense and non-recurring items			82.5p	92.9p
Diluted earnings per share adjusted for amortisation expense and non-recurring items			81.4p	91.9p

A total of 2,311,976 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 2011 (2010: 2,246,025).

 8 Cash flow from operating activities

			2011	2010
		Notes	£m	£m
Profit from operations for the year			40.8	41.8
Adjusted for:
Amortisation of fixed life intangible assets			3.9	5.5
Share of net profit of equity accounted joint ventures			(0.3)	(0.1)
Depreciation of property, plant and equipment			9.5	8.8
Expense in respect of share options			0.5	0.7
Defined benefit obligation payment			(0.7)	(0.7)
Defined benefit obligation charge			0.1	0.2
Net gain from bargain purchase of subsidiary previously
held as equity interest		11	-	(2.0)
Gain on disposal of property, plant and equipment			(1.0)	(0.5)
Increase in investment properties			(7.0)	(2.5)
Revaluation of investment properties			0.2	-
Increase in shared equity loan receivables			(4.9)	(4.0)
Movement in fair value of shared equity loan receivables			0.9	(0.3)
Increase/(decrease) in provisions			6.6	(1.4)
Operating cash flows before movements in working capital			48.6	45.5
(Increase)/decrease in inventories			(3.2)	12.8
Increase in receivables			(7.3)	(66.8)
(Decrease)/increase in payables and short-term provisions			(41.1)	107.7
Movements in working capital			(51.6)	53.7
Cash (utilised in)/generated from operations			(3.0)	99.2
Income taxes paid			(6.8)	(6.4)
Interest paid			(2.0)	(2.2)
Net cash (outflow)/inflow from operating activities			(11.8)	90.6

Additions to leased property, plant and equipment during the year amounting to £1.2m (2010: £1.7m) 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.

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 transactions to provide construction and property development services with related parties, all of which were joint ventures, not members of the Group. Transactions and amounts owed at the year end are as follows:

		Provision of goods and services		Amounts owed by/(to) related parties
		2011	2010	2011	2010
		£m	£m	£m	£m
Claymore Roads (Holdings) Limited		-	-	0.4	-
Community Solutions Investment Partners Limited		2.1	19.5	0.3	0.5
Renaissance Miles Platting Limited		0.1	0.1	-	-
Blue Light Holdings Limited		0.3	0.3	-	0.1
Ashton Moss Developments Limited		-	-	(0.2)	(0.2)
Bromley Park Limited		-	-	(0.6)	(0.6)
Chatham Place (Building 1) Limited	(a)	n/a	0.1	n/a	n/a
ECf (General Partner) Limited		2.0	1.7	-	-
Eurocentral Partnership Limited	(a)	n/a	1.9	n/a	n/a
Lewisham Gateway Developments Limited		-	-	0.2	0.2
North Shore Development Partnership Limited	(b)	n/a	-	n/a	0.1
The Compendium Group Limited		3.7	0.5	0.6	0.1
Access for Wigan (Holdings) Limited		19.5	0.1	0.3	-
Hull Esteem Consortium PSP Limited		46.7	50.2	1.2	4.8
St Andrews Brae Developments Limited		2.8	4.0	0.1	4.0
Taycare Health (Holdings) Limited		-	1.8	-	-
The Bournemouth Development Company LLP		0.1	-	0.5	-
		77.3	80.2	2.8	9.0
(a) In 2010 Chatham Place (Building1) Limited and Eurocentral Partnership Limited became wholly owned subsidiaries of the Group
(b) In the course of the year North Shore Development Partnership Limited became a wholly owned subsidiary of the Group

				Amounts owed by/(to) related parties
				2011	2010
				£m	£m
Amounts owed by related parties				3.6	9.8
Amounts owed to related parties				(0.8)	(0.8)
				2.8	9.0

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

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 to or received from related parties. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed to or owing by related parties are non-interest bearing.

Remuneration of key management personnel

The remuneration of the directors, who are key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'.

			2011	2010
			£m	£m
Emoluments			3.2	2.2
Social security contributions			0.4	0.3
Other long-term benefits			-	0.2
Post-employment benefits			0.2	0.4
			3.8	3.1

Directors' transactions

During 2010, Eurocentral Partnership Limited (a wholly owned subsidiary of the Group) sold some land and buildings in the ordinary course of business to a syndicate of investors on arm's length terms. Certain senior employees and directors of Muse Developments Limited together with John Morgan (£0.6m) and Paul Smith (£0.4m) participated in the syndicate. Their investments were carried out on an arm's length basis and on the same terms as other investors in the syndicate and there are no amounts outstanding.

Directors' material interests in contracts with the Company

No director held any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 20 February 2012.

10 Contingent liabilities

Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating companies in 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.

As at 31 December 2011, contract bonds in issue under uncommitted facilities covered £204.1m (2010: £171.8m) of contract commitments of the Group.

11 Acquisition of subsidiaries

Final acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited

On 9 September 2010, the Group acquired the business, obligations and certain assets from the administrators of Connaught Partnerships Limited ('Connaught'). On pages 104 and 105 of the Group's 2010 annual report and accounts, the provisional fair values of the net assets and goodwill acquired were reported. The Group has since completed the fair value exercise. This led to further adjustments of £1.1m. The goodwill arising and fair values are as follows:

				£m
Total purchase consideration: cash				28.0
Net assets acquired				4.5
Goodwill				23.5

Goodwill arising on this acquisition represents the value of people, track record, expertise and opportunity to access new markets acquired within acquisitions that are not capable of being individually identified and separately recognised.

	Acquiree's carrying amount	Provisional fair value adjustments made 31 December 2010	Final fair value adjustments made 31 December 2011	Fair value 31 December 2011
	£m	£m	£m	£m
Intangible asset	-	4.0	-	4.0
Trade receivables and amounts on construction contracts recorded by Connaught	72.4	(44.4)	-	28.0
Provisions	-	(26.4)	(1.1)	(27.5)
Net assets acquired	72.4	(66.8)	(1.1)	4.5

The final fair value of certain provisions reflects the directors' best assessment of redundancy and other costs associated with contracts that did not novate and currently there remains some inherent uncertainty over the final determination of these liabilities.

				£m
Purchase consideration settled in cash				28.0
Cash and cash equivalents acquired				-
Cash outflow on acquisition				28.0

Acquisition of investment from partner in a joint venture

During the year the Group, through its subsidiary Muse Developments Limited, acquired from Urban Splash Yorkshire Limited its 50% interest in the jointly owned North Shore Development Partnership Limited. As a result of the transaction, Muse Developments Limited now owns the entire issued share capital of North Shore Development Partnership Limited. The total amount payable to Urban Splash Yorkshire Limited for the purchase was £0.4m, which was paid in cash.  This transaction has been accounted for as a step acquisition under IFRS 3 'Business combinations'.

The fair value of the Group's existing 50% interest in North Shore Development Partnership Limited was £1.5m, comprising equity £0.9m, goodwill of £0.2m and an intangible asset of £0.4m. The directors determined that the fair value of the pre-existing interest in the joint venture was different from its carrying value of £2.2m. The total consideration due to Urban Splash Yorkshire Limited for the remaining 50% interest was £0.4m and the fair values of the identifiable net assets of the whole of North Shore Development Partnership Limited were as follows:

				Fair value
				£m
Intangible asset				0.9
Inventories				1.8
Identifiable net assets				2.7

On disposal of original interest:
	Equity	Goodwill	Intangible asset
	£m	£m	£m		£m
Fair value	0.9	0.2	0.4		1.5
Book value	(0.9)	(0.2)	(1.1)		(2.2)
Loss on disposal of original interest					(0.7)
On acquisition of controlling interest:					£m
Fair value of original interest					1.6
Cash paid					0.4
					2.0
Fair value acquired					(2.7)
Negative goodwill					(0.7)
The net effect on result for the year is as follows:					£m
Loss on disposal of original interest					(0.7)
Negative goodwill					0.7
					-

The cash outflow in respect of this acquisition during the year ended 31 December 2011 was £0.4m, being £0.4m paid to Urban Splash Yorkshire Limited net of nil cash acquired.

12 Key risks

Summary of key risks

The Group's strategy is to develop the market position of its construction activities and to use the cash generated from those activities to invest in housing-led and mixed-use regeneration to generate higher levels of return.

The Group has put in place a risk management framework to identify risks to the business achieving its goals and to document controls to manage and mitigate these risks. Risk registers document these risks and controls at different levels within the organisation; Group, Division, Business Unit and Project. These risk registers are reviewed at least every six months to ensure that risks are properly evaluated and that controls remain appropriate. The Internal Audit function audits the control environment to ensure that the risks and controls identified are tested at least every two years, which cover a blend of project and corporate level risks.

It is the role of the Group's audit committee to monitor and approve the work undertaken by the Internal Audit function and to ensure that the internal audit process remains efficient and effective. This monitoring process has been strengthened by audit committees being established separately for the Construction and Infrastructure and Affordable Housing divisions, which have larger and more complex operations than the other divisions.

The control environment is underpinned by a clear set of delegated authorities that define processes and procedures for approving key decisions, particularly with regard to project pre-qualifications, tender pricing and bid submission. This ensures that projects are approved at the appropriate level of management, with the largest and most complex projects being approved at Board level.

The following key risks to the Group achieving its strategic goals have been identified by the Board.

Risk description and 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 the impact of the challenging economic conditions, changes in Government spending and the increasing emphasis on infrastructure investment.
New opportunities Shortage of opportunities caused by macroeconomic factors and reduction in Government spending. Fall in construction activities may result in less cash being generated which will reduce the capital available to invest in regeneration.	·      Sector spread and diversification offer some protection against decline in individual sectors ·      Scale also gives some protection by enabling us to compete and work in areas with higher barriers to entry ·      Regular monitoring and reporting of financial performance, work won, prospects and pipeline of opportunities.
Overcapacity in market This leads to pricing competition and more onerous terms and conditions being sought by customers. Increased price competition leads to downward pressure on margins and an increased risk profile if onerous terms and conditions are accepted. Ultimately overheads may not be covered by gross margins if project losses are incurred.	·      Delegated authorities in place require approval of tenders by appropriate level of management, covering both price and terms and conditions ·      Seek to differentiate the Group through the quality of the service and consistency of delivery ·      Regular review of resource levels against anticipated workload.
SUSTAINABILITY: The Group's health, safety and environmental (HSE) performance and business conduct affects employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance.
Environmental or safety incident An accident or incident causes harm to individuals or a community and leads to a major loss of corporate reputation. Consequently the Group fails to pre-qualify for contracts due to poor HSE track record.	·      Key executives with specific responsibility for HSE are identified in each division and on the Board ·      HSE policy frameworks are communicated and senior managers appointed in each division ·      Established safety systems, site visits, monitoring and reporting (including near miss and potential hazard reporting) are in place across the Group ·      Investigation and root cause analysis of accidents or incidents and near misses ·      Regular health HSE training and updates including behavioural training.
Business conduct Failure by employees to observe the appropriate standards of integrity and conduct in dealing with customers, suppliers and other stakeholders. Could expose the Group to significant potential liability and reputational damage that results in it failing to pre-qualify for contracts.	·      Independent raising concerns phone line available for all employees ·      Audit committee reviews incidents log from the raising concerns phone line which includes the outcome of investigations into such incidents and any follow up actions ·      Ethics policy communicated to all employees. ·      Reviews and risk assessments undertaken by Group to ensure adequate procedures are in place and followed to ensure compliance with competition and anti-bribery legislation.
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.
Misprice contract When pricing a contract, the planned works are not costed correctly or risk is not properly evaluated leading to a contract being mispriced. Leads to loss of profitability on a contract and reduces overall gross margin.	·      System of delegated authorities governs tenders and the acceptance of work ·      A contract tender is reviewed at three key stages; pre-qualification, pre-tender and final tender submission ·      Contract tender approved by appropriate level of management.
Managing changes to contracts and contract disputes As contracts progress there are inevitably changes to the works being delivered and a risk exists that the Group does not get properly reimbursed for the cost of the changes as a result of disagreement,  poor commercial controls or disputes. Leads to costs being incurred that are not recovered and loss of profitability on a contract. Ultimately we may need to resort to legal action to resolve disputes which can prove costly, and the outcomes can be uncertain.	·      Work carried out under standard terms wherever possible ·      Well established systems of measuring and reporting project progress and estimated outturns ·      Contract terms are reviewed at tender stage and any variations approved by the appropriate level of management ·      Decision to take legal action based on appropriate legal advice ·      Suitable provision made for legal costs.
Poor project delivery The quality of workmanship or poor commercial and operational delivery of a contract does not meet clients' expectations. Interim cash payments may be withheld impacting working capital and issues may also impact contract profitability and corporate reputation.	·      Strategic trading arrangements in place with key suppliers and subcontractors to help ensure consistent quality ·      For very significant purchases on large projects, forward orders can be placed on a longer timescale ·      Collation and review of client feedback ·      Lessons learned exercises carried out on projects ·      Staff incentivised on basis of contract performance ·      Cross- regional peer reviews.
Poor contract selection Risk that the Group accepts a contract outside of its core competencies. This may lead to poor understanding of project risks, poor project delivery and ultimately result in contract losses and reputational damage.	·      Business planning identifies sectors and clients that the Group will target ·      System of delegated authorities governs tenders and the acceptance of work ·      Plans for specific types of work and contract size agreed by individual business unit.
COUNTERPARTY AND LIQUIDITY RISK: 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 Risk that insufficient credit checks and due diligence is not undertaken and that a key client, subcontractor or supplier becomes insolvent. Insolvency of a client may result in significant financial loss due to bad debt. Insolvency of a subcontractor or supplier may disrupt a contract's programme of work and lead to increased costs in finding replacements for their services.	·      Work only carried out for financially sound clients, established through credit checks ·      Specific commercial terms, including payment terms, with escrow accounts used as appropriate ·      Seek and obtain financial security where appropriate ·      Work with approved suppliers wherever possible ·      Contracts with clients, subcontractors or suppliers only entered into after review at appropriate level of delegated authority.
Management of working capital Risk that poor management of working capital leads to inadequate liquidity and funding problems. The lack of liquidity impacts the Group's ability to continue to trade or restricts its ability to invest in regeneration schemes.	·      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 ·      Overdue work in progress, debtors and retentions monitored and actioned as appropriate.
ACQUISITIONS: The Group regularly identifies and evaluates potential acquisitions and it is important that acquisitions deliver the planned benefits.
Integration of acquisition Group fails to deliver benefits sought at time of the acquisition, through issues with due diligence, strategic assessment, alignment of cultures or other reasons. Unknown liabilities are uncovered subsequent to completion. The impact is potential loss of profitability and reputation and that excessive resources are required to be directed towards the acquisition.	·      All acquisitions approved at Board level ·      Commercial and financial due diligence led by senior teams, with clear roles and responsibilities ·      Post acquisition integration plans prepared and monitored ·      KPIs established and monitored post acquisition.

13 Subsequent events

On 15 February 2012 the Group disposed of its 33% interest in the Dorset Fire & Rescue PFI for cash consideration of £3.8m.  This represents a discount on the directors' valuation cash flows of 7%.

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 2011. 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 21 February 2012 and is signed on its behalf by:

Paul Smith                                      David Mulligan

Chief Executive                                Finance Director

21 February 2012

 

END

 

 

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