Investment Column: Get in on ground floor at Morgan Sindall
Wednesday 06 July 2011
Our view: Buy
Share price: 659p (+18p)
We've been long-term holders of the construction group Morgan Sindall, which issued an optimistic trading statement yesterday suggesting that it could be the time to upgrade our view.
The group operates across a range of sectors including infrastructure, social housing, fitting out completed developments and project management. It also has an investment arm that provides funding and expertise for public projects.
Anything with the words "public sector" attached to it generally causes investors to run. And the housing market continues to be constrained by banks' unwillingness to lend. But the points in Morgan Sindall's favour outweigh any negatives.
The Government has indicated a desire to maintain spending on infrastructure, and its £200bn, five-year plan compares with a spend of £150bn previously. Morgan Sindall should be able to grab a slice of that work, but at the same time management have sensibly reduced the proportion of revenues provided by the state to around 50 per cent from over 60.
There are also some signs of life in the affordable housing sector – particularly when it comes to private sales. Although a lack of finance is stillconstraining volumes, lenders are beginning to show some movement and margins have touched up.
The company's overall pipeline is strong – work includes Crossrail – while Morgan Sindall said yesterday that it was in the frame for parts of the £1.2bn facelift of Gatwick Airport. Meanwhile, its fitting-out business should pick up as recently commissioned projects near completion.
Despite the positives, the company sits on a very undemanding valuation of just 7.7 times this year's forecast earnings, falling to 7.1 times next year. The prospective yield is a tasty 6.6 per cent, and the dividend is two times covered by earnings. Management say they believe that 2011 will be their worst year, after which things should steadily pick up. If that is the case, these shares could look like a real bargain in 12 months' time. Buy.
Our view: buy
Share price: 110.5p (+2.25p)
It is rare to find a company that loves to be walked all over, but Marshalls is certainly one. The company laid the flooring at the O2 Arena in London's Docklands and has also paved Trafalgar Square. It is currently working on projects at the 2012 Olympic Games sites, including installing security bollards strong enough to halt armoured cars. But Marshalls is not all vast infrastructure projects, which make up about 60 per cent of sales. It also has a tidy business of domestic landscaping, including paving and garden patios.
The Yorkshire-based business released a trading update yesterday, saying revenues for the six months to the end of June were 9 per cent higher than a year ago, at £177m, despite a tough trading environment. It is closing unnecessary sites, with one on the south coast of England sold in June for £5m, as well as surplus garages and greenhouse-making operations.
Management said the outlook for its public sector and commercial markets remain "mildly positive" but the second-half comparatives would be tougher. Yet Rachael Waring, an analyst at Panmure Gordon, believes the company is in a good position to benefit from a market recovery, calling it a "high-quality, well-invested business".
Numis has the stock on a price of 20.3 times estimated 2012 earnings, with a yield of 4.8 per cent. This stock has good potential. Buy.
Our view: hold
Share price: 148p (-3.5p)
High-performance foam manufacturing may not be the world's most exciting industry, but Zotefoams' products can be found in everything from prosthetic limbs to sporting gear such as cricket pads or ice hockey masks.
Yesterday, the Croydon-based firm revealed that its like-for-like sales were up by 10 per cent year on year. Adrian Kearsey, of Evolution Securities, said the news showed it was "benefiting from the rebound in economic activity" There was further positive news from its statement that the integration of MuCell – which it bought in March – is now complete.
Still, the company, which is listed on the fledgling index, warned over the effect of high raw material prices on its margins, and there were also no upgrades to estimates, as some may have been hoping for.
The dividend yield nevertheless justifies holding on to the stock, but that's as far as it goes, so hold.
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