While other construction companies have suffered profit warnings and sinking share prices due to worries about the health of the domestic economy, Morgan Sindall (LSE: MGNS) has been off to the races over the past year with its share price rocketing more than 120% during that time.
The company’s secret has been its diversified business model that offers not just the usual construction and infrastructure services, but also higher margin services such as fitting-out offices, maintaining properties and partnering with councils to build and redevelop housing stock.
In the six months to June the benefits of this model were clear as revenue from each of its business lines increased by at least 9% year-on-year (y/y) with total sales for the period rising 14% y/y to £1,307m. An improvement to margins across each business line, as well as above group average growth from the higher-margin office fit-out division, led to group operating margins rising from 1.6% to 1.9% y/y and overall operating profit rising to £24.9m.
Looking ahead, there’s reason to be confident this performance can continue as the group order book has risen 5% to £3,800m with 68% of this order backlog for 2018 and beyond. Most encouraging is the fact that the fit-out business backlog rose 22% y/y to £568m, which is important as this is the group’s most profitable business with operating margins of 4.3% in H1.
And while Morgan Sindall is still exposed to the health of the broader construction market, I like that its founder and CEO John Morgan has both skin in the game with a 10% stake, and a conservative approach with net cash at period-end a very health £96m. All these positives mean the company’s shares are pricier than rivals’ at 13.7 times forward earnings, but they still offer a nice dividend that currently yields 2.45% and is growing by double-digits. I’m not sure I’d invest in a construction company at this point in the economic cycle, but if I did, Morgan Sindall would be at the top of the list.
Another under-the-radar stock that’s been performing well is workwear and hotel and restaurant textile renter Johnson Service Group (LSE: JSG). Shares of the company are up in value over 45% in the past year thanks to double-digit revenue and profit growth from acquisitions and organic growth.
In 2016 this combination helped boost sales by 36.4% y/y while synergies related to acquisition integration and increased cross-selling opportunities boosted operating margins to 16.2% and increased adjusted operating profit by 45.6% y/y to £37.7m.
There’s considerable room for both sales and margins to continue their upward trend as the group uses its increased scale to target larger customers, pursue further bolt-on acquisitions and drive down supply costs through increased bargaining power. The group is already setting the stage for this future growth by investing in its factories to both increase efficiency and expand production capacity.
However, after appreciating so quickly over the past year, the company’s shares are looking quite pricey at 17.1 times forward earnings. While the company is growing nicely, this valuation is above the group’s historic average and means would-be investors should exercise caution.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.