VALUE INVESTING
Building Value – Morgan Sindall

By Stephen Bland (TMFPyad)
November 24, 2000

Construction again. Boring, I know, but this sector happens to be where a lot of the value action has been in recent times. But never forget that boring is beautiful with value shares. Dullness is a pure financial aphrodisiac when it comes to this strategy.

Again, not a pyad share, Morgan Sindall (LSE: SNDL) (www.morgansindall.co.uk) has some interesting features, though fewer than many value investors might like. Here are the fundamentals:

• Share price 270p
• High/low this year 343/220
• High/low last five years 355/81
• Market capitalisation 102m
• Normalised earnings per share year ended 31/12/99 33.1p
• Lowest recent EPS forecast for year ending 31/12/00 29.4p; 2001 34.8p
• P/E ratio historical 8.2; on 2000 EPS 9.1; on 2001 EPS 7.8
• Yield on historical dividend 3.1%; on 2000 forecast 3.7%
• Price/Tangible Book 5.2
• Net Cash 34%
• One year relative strength -5.7% (i.e. negative)
• Directors own 33.6% of the shares, other majors 10.0%

The company has four divisions, of which three are engaged in various construction activities and the fourth is property investment and trading. This can cause an uneven profit flow, depending when a property is sold. In the interim report to 30 June 2000, EPS was down from the previous years interim and the reason given was the loss from a discontinued housing maintenance business.

However there is some very powerful directorspeak in there because the chairman comments that the marketplace overall remains good and workload for 2001 is building at a faster pace than in any previous year. That is pretty unequivocal and there are further remarks on strong growth continuing for some time.

In June 1999 the company purchased Lovell, a company which now forms one of its divisions termed affordable housing". This is essentially housing association and similar low-cost residential development. Not, therefore, high margin stuff. In fact turnover for the six months from this activity was 50m with an operating profit of 1.1m. Unexciting, but the company claims to be able to improve on this. Profits from the other construction divisions, fit out and regional construction, both turned in excellent interim figures.

The company has an excellent growth record. EPS has risen very strongly from 7.6p in 1995 to 33.1p in 1999 without a drop. 2000 will see a drop, on the forecast, to 29.6p, but then growth resumes, assuming of course that the forecasts are met. The directorspeak is very strongly suggesting this will turn out to be the case. The company has maintained a net cash position for the whole of this period and dividends have been increased very substantially from 2.7p in 1995 to 8.5p in 1999 with rises forecast for 2000 and 2001. The actual interim dividend for 1999 has already been increased.

Superficially, this share may not look particularly attractive to many value players. EPS is even set to fall this year compared with last, not a situation that I would normally consider worth looking at. Yield is modest, Price/Book is nowhere. The value features, though, are that it has net cash and the P/E is undemanding. However there are many other construction shares on more attractive ratios.

Yet, reading the report, some faintly pleasant smell arises from the company, possibly because I like the divisional split. It is not a pure housebuilder or a pure anything but seems to be able to work the differing aspects of its businesses to produce an attractive whole. I like also the fact that they disposed of a loss-making division, which may well be the reason for the forecast dip this year, though that is not entirely clear from the interim report.

I see some mileage here, despite the fact that there are shares with better fundies in the sector. Cant quite put my finger on it...

Where Next?

• What is a pyad share?
• Value investing discussion board