US Edition Morgan Sindall
479p +19p
Questor says Buy
FOR a company which works in the construction sector, Morgan Sindall was full of surprises yesterday as it unveiled a record set of full-year results. The group, which fits out offices and provides affordable homes and infrastructure services, posted an 8pc rise in pre-tax profits to £62.3m.
The strong figures, combined with comments from the group that it is "financially robust" with a strong cash position, saw the shares rise as high as 501p before closing up at 479p.
Part of the reason the shares performed well yesterday was that over the past few months investors have heavily sold off anything related to the construction sector. This means shares in Morgan Sindall have, unfortunately, fallen since Questor last advised investors to hold on in July, when they were trading at 585½p.
The construction sector shows few signs of improving, and the company has admitted that weakness in the commercial property and housing sectors is likely to continue. Chairman John Morgan said he expects market conditions in 2009 to "remain challenging" but he is optimistic the group will emerge from these times "as an even stronger business".
There are a number of reasons why Mr Morgan has reason to believe that the group is well placed to weather the storm. Roughly three quarters of the group's profits come from the public sector, such as social housing, building schools and hospitals and by completing civil engineering work for regulated industries, such as water and energy.
The cash on its balance sheet has fallen from £219m last year due largely to the values of the houses it has built falling, and £40m worth of provisions related to the acquisition of two businesses from engineer Amec in 2007. Still, Morgan Sindall ends the year with £120m of cash.
It also has £75m debt facilities available if it wants to make acquisitions or further invest in growing its existing businesses organically. Its order book has fallen from £4.3bn at the end of 2007 to £3.7bn but yesterday's update provides investors with some visibility.
Importantly, despite the difficult backdrop, the company has managed the rare feat of lifting its total dividend by 11pc to 42p. It has reiterated its policy to increase its dividend broadly in line with the growth in earnings, aiming to cover payouts by between two and a half and three times earnings. The dividend is three times covered.
The increase in the dividend means Morgan Sindall is yielding 8.7pc – even after taking account of the yesterday's rise.
Investing in the construction sector is undoubtedly a risk in these turbulent times, and considering the difficult markets Morgan Sindall works in, the dividend could be cut next year. But with the shares trading on a price-earnings ratio of 4.5 times, a lot of this risk is already priced in. Buy.
St James's Place
176½p -5½p
Questor says Hold
THERE was little new information in yesterday's full-year results to really get shares in St James's Place moving higher, although as ever, senior executives at the wealth management group expressed optimism about its future.
The company, which sells savings and pension products to high-net wealth customers, had previously announced that funds under management stood at £16.3bn on December 31, down 10.4pc on the year because of falling stock markets.
A 16pc fall in operating profits was pretty much in line with expectations and last month the group also revealed it was continuing to grow the business by taking on more partners to sell its products.
Chief executive David Bellamy, however, was insistent that St James's is doing everything by the book, in spite of the unpredictable economic environment. "We will continue to prove the resilience of our business," he said. "We saw good levels of business in 2008."
Mr Bellamy is convinced the group will pick up more business as the tax year comes to an end and there is an increased need for more investment advice considering the low interest rates. He added that Individual Savings Accounts season is looming and people are still saving for retirement.
He also said that only 8pc of St James' customers are based in the City, so the group will not necessarily be hit by the Square Mile's heavy job losses.
There are a number of factors outside the company's control, though, which will have a monumental impact on the group. Besides stock market volatility, a question mark continues to hover over St James's future, with 60pc shareholder Lloyds Banking Group known to be looking at selling non-core assets.
Mr Bellamy said yesterday that Lloyds had expressed a "commitment" to wealth management business in general, but it is unclear whether St James's will be a core part of the business going forward. Still, it is likely that Lloyds will sell other assets such as Scottish Widows and Clerical Medical first.
St James's is yielding just 2.4pc but is on an undemanding six times forecast earnings. The shares have outperformed the insurance sector in recent weeks as St James's has not suffered from worries about its solvency.
There may be little to spur the shares on in the short-term as market conditions continue to be tough, but when the economy picks up, St James's should be well placed to benefit. Hold.