23 February 2023

 

 

 

MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'Group')

 

The Construction & Regeneration Group

 

RESULTS FOR THE FULL YEAR (FY) ENDED 31 DECEMBER 2022

 

 

	FY 2022	FY 2021	Change
Revenue	£3,612m	£3,213m	+12%
Operating profit - adjusted1	£139.2m	£131.3m	+6%
Profit before tax - adjusted1	£136.2m	£127.7m	+7%
Earnings per share - adjusted1	237.9p	226.0p	+5%
Net cash at year end	£355m	£358m	-£3m
Total dividend per share	101.0p	92.0p	+10%
Operating profit - reported	£88.3m	£129.8m	-32%
Profit before tax - reported	£85.3m	£126.2m	-32%
Basic earnings per share - reported	132.7p	212.4p	-38%

 

¹ 'Adjusted' is defined as before intangible amortisation of £2.0m and exceptional building safety charge of £48.9m

 (FY 2021: before intangible amortisation of £1.5m and (in the case of earnings per share) deferred tax charge of £5.1m)

 

FY 2022 summary:

·    Record results reflect a strong year of operational and strategic progress despite market headwinds

o Revenue up 12% to £3.6bn

o Adjusted profit before tax up 7% to £136.2m

·    Continued balance sheet strength

o  Net cash of £355m (FY 2021: £358m)

o Average daily net cash of £256m (FY 2021: £291m)

·    High quality and substantial order book with secured workload of £8.5bn

o 2% lower than prior year end  

·    Total dividend up 10% to 101p per share

·    Exceptional charge for Building Safety in line with previous guidance of £48.9m

·    Continued leadership in sustainability

o  MSCI 'AAA' rating retained for Group's ESG performance

o  CDP 'A' rating retained for Group's leadership on climate change

·    Divisional highlights

o Another excellent performance from Fit Out; operating profit up 18% to £52.2m (FY 2021: £44.2m)

o Steady performance from Construction & Infrastructure; operating margin of 3.3% (FY 2021: 3.8%) and operating profit of £52.1m (FY 2021: £58.1m) against strong prior year comparatives

o Property Services' operating profit¹ up 5% to £4.3m (FY 2021: £4.1m)

o Strong contribution from Partnership Housing with revenue up 22% to £696m (FY 2021: £572m) and operating profit¹ up 13% to £37.4m (FY 2021: £33.2m)

o Good progress by Urban Regeneration; operating profit¹ up 56% to £18.9m (FY 2021: £12.1m) and return on capital¹ in year of 20%  

 

Commenting on today's results, Chief Executive, John Morgan said:

 

"The Group delivered a strong performance in 2022, with significant strategic and operational progress made across the business despite the market headwinds. These results are another record for the Group and they reflect the high quality of our operations and the talent and commitment of our people.

 

With the more challenging economic backdrop, our strong balance sheet including our substantial net cash position provides us with confidence and enables us to continue operating efficiently and effectively. Particularly, it allows us to continue making the right decisions for the long term, to maximise our competitive advantage, and to best position us in our markets for continued sustainable long-term growth.

 

We remain committed to delivering economic, social and environmental value for all our stakeholders, and I am particularly pleased that the Group has retained both its 'AAA' rating from MSCI and its 'A' rating from CDP for our leadership on climate change.

 

While there remains significant macroeconomic uncertainty, Morgan Sindall is a strong and agile business which is well-placed to overcome the challenges of the coming year and also well-positioned to take advantage of the opportunities that arise in this type of environment.  There are early signs that inflation, particularly labour inflation, has plateaued and is starting to fall in some areas. We look forward with optimism and although it is still early in the year, we're well-positioned to deliver a result for 2023 which is in line with our current expectations."

 

 

Morgan Sindall Group John Morgan Steve Crummett   Instinctif Partners Matthew Smallwood Bryn Woodward

Tel: 020 7307 9200       Tel: 020 7457 2020

 

Presentation

·   There will be an analyst and investor presentation at 09.00am at Numis Securities Limited, 45 Gresham Street, London EC2V 7BF.  Coffee and registration will be from 08.30am

·    A copy of these results is available at: www.morgansindall.com

·   Today's presentation will be available via live webcast from 09.00am at www.morgansindall.com.  The presentation will be available via playback on our website in the afternoon.

 

Note to Editors

Morgan Sindall Group

Morgan Sindall Group plc is a leading UK Construction & Regeneration group with annual revenue of £3.6bn, employing around 7,200 employees and operating in the public, regulated and private sectors.  It reports through five divisions of Construction & Infrastructure, Fit Out, Property Services, Partnership Housing and Urban Regeneration.

 

 

The Group's strategy is focused on its well-established core strengths of Construction and Regeneration in the UK. The Group has a balanced business which is geared toward the increasing demand for affordable housing, urban regeneration and infrastructure and construction investment.

 

Morgan Sindall's recognised expertise and market positions in affordable housing (through its Partnership Housing division) and in mixed-use regeneration development (through its Urban Regeneration division) reflect its deep understanding of the built environment developed over many years and its ability to provide solutions for complex regeneration projects. As a result, its capabilities are aligned with sectors which support the UK's current and future regeneration and affordable housing needs.

 

Through its Construction & Infrastructure division, the Group is also well positioned to meet the demand for ongoing investment in the UK's physical infrastructure, while its geographically diverse construction activities are focused on key areas of education, healthcare and commercial.

 

The Fit Out division is the market leader in its field and delivers a consistently strong operational performance. Fit Out, together with the Construction & Infrastructure division, generates cash resources to support the Group's investment in affordable housing and mixed-use regeneration. The Group also has an operation in Property Services which is focused on response and planned maintenance activities provided to the social housing and the wider public sector.

 

 

Under the two strategic lines of business of Construction and Regeneration, the Group is organised into five reporting divisions as follows:

 

Construction activities comprise the following operations:

 

·    Construction & Infrastructure: Focused on the education, healthcare, commercial, industrial, leisure and retail markets in Construction; and on the highways, rail, energy, water and nuclear markets in Infrastructure. Infrastructure also includes the BakerHicks design activities based out of the UK and Switzerland

·     Fit Out: Focused on the fit out of office space with opportunities in commercial, central and local government offices and further education 

·     Property Services: Focused on response and planned maintenance activities provided to the social housing and the wider public sector

 

Regeneration activities comprise the following operations: 

 

·     Partnership Housing: Focused on working in partnerships with local authorities and housing associations. Activities include mixed-tenure developments, building and developing homes for open market sale and for social/affordable rent, 'design & build' house contracting and planned maintenance & refurbishment

·     Urban Regeneration: Focused on transforming the urban landscape through partnership working and the development of multi-phase sites and mixed-use regeneration

 

 

In addition to presenting the financial performance of the business on a statutory basis, adjusted performance measures are also disclosed. Refer to the Other Financial Information section which sets out the basis for the calculations. These measures are not an alternative or substitute to statutory UK IAS measures, however are seen as more useful in assessing the performance of the business on a comparable basis and are used by management to monitor the performance of the Group.

 

In all cases the term 'adjusted' excludes the impact of intangible amortisation of £2.0m and of the exceptional building safety charge of £48.9m. For FY 2021, 'adjusted' excluded the impact of intangible amortisation of £1.5m and (in the case of earnings per share) a deferred tax charge of £5.1m.

 

 

Summary Group financial results

 

The Group delivered a strong performance in 2022, with significant strategic and operational progress made across the business despite the market headwinds. The results were another record for the Group and reflected the high quality of the Group's operations and the talent and commitment of its people.

 

Group revenue increased by 12% up to £3,612m (FY 2021: £3,213m), while adjusted operating profit increased 6% to £139.2m (FY 2021: £131.3m). Adjusted operating margin was 3.9%, 20bps lower than the prior year (FY 2021: 4.1%). The net finance expense reduced to £3.0m (FY 2021: £3.6m) resulting in adjusted profit before tax of £136.2m, up 7% (FY 2021: £127.7m).

 

The statutory profit before tax was £85.3m, a decrease of 32% (FY 2021: £126.2m). This was mainly due to the exceptional Building Safety charge of £48.9m incurred in the year (see below) which was in line with the guidance issued in August with the half year results.

 

The adjusted tax charge for the period was £27.0m (statutory tax charge of £24.4m), an effective rate of 19.8% on adjusted profit before tax.

 

The adjusted earnings per share increased 5% to 237.9p (FY 2021: 226.0p). The statutory basic earnings per share of 132.7p was down 38% (FY 2021: 212.4p), similarly impacted by the exceptional Building Safety charge of £48.9m incurred in the year.

 

General market conditions

Across the Group, inflationary pressures and supply issues have been a significant headwind throughout the year. Rising energy prices, supply constraints on certain materials and increased trade and labour costs have continued to place upward pressure on total build costs, which in turn has placed increased strain on the stability of the supply chain. Towards the end of the year and going into 2023, there were early signs that inflation, particularly labour inflation, had plateaued and was starting to fall.

 

Where projects are active and underway, the additional costs arising have generally been offset by a combination of contractual protection, operational efficiencies, flexible sourcing and (in the case of Partnership Housing) by house sales price inflation. On projects where it has not been possible to mitigate all such additional costs in full, the resulting impact on margins has been unavoidable.

 

Where projects are being priced for future delivery, the inflationary environment has continued to place some project budgets under pressure particularly in Construction & Infrastructure, which in turn has led to some delays in decision-making and project commencement.  However, these have been minimal in number, with generally most of the public and regulated sector clients which the Group serves indicating that committed spending on capital projects remains in place.

 

The market for Fit Out's services has remained very strong, driven by factors such as lease renewals, the move towards hybrid working practices, the requirement for greater energy efficiency from offices and the use of office space as a tool for enhancing staff retention and brand image.

 

In Partnership Housing, demand for the partnership model focusing on long-term partnerships with the public sector remained positive throughout the year. However, in line with the rest of the UK housing industry, the division experienced a significant slowdown in its sales rates of private homes on its mixed-tenure sites in the fourth quarter driven by the combination of economic uncertainty together with changes to mortgage rates and availability.

 

In Urban Regeneration, construction cost inflation has provided some challenges to the returns on some of its active developments and has led to some delays in decision-making and project commencement on some other schemes, however the overall impact has not been material.   

 

Divisional performances

 

On a divisional basis, Construction & Infrastructure continued with its disciplined focus on operational delivery and contract selectivity and delivered a steady result. Revenue increased 3% to £1,569m (FY 2021: £1,520m), while operating profit was down to £52.1m (FY 2021: £58.1m) impacted by market factors described above. Fit Out delivered another excellent performance, with revenue and operating profit both increasing substantially. Revenue grew 22% to £968m (FY 2021: £795m), while operating profit increased by 18% to £52.2m (FY 2021: £44.2m). Property Services also increased its operating profit, up 5% to £4.3m (FY 2021: £4.1m), with revenue up 22% to £163m (FY 2021: £134m).

 

Of the Group's regeneration divisions, Partnership Housing performed well, with a strong operational performance delivering operating profit of £37.4m, an increase of 13% (FY 2021: £33.2m), on revenue of £696m (FY 2021: £572m). Urban Regeneration made good progress with its long-term development portfolio and delivered an operating profit of £18.9m, up 56% on last year (FY 2021: £12.1m) resulting in its return on capital employed for the year increasing to 20%.

 

Secured workload

 

The Group has a high-quality workload and maintaining contract selectivity and bidding discipline to ensure the appropriate risk balance in the order book remains of critical importance to the future success of the Group. The total secured workload for the Group at the period end was £8,459m, down 2% on the prior year-end position (FY 2021: £8,614m) and 1% lower than at the half year (HY 2022: £8,519m).

 

Balance sheet & cash

 

The Group's Capital Allocation Framework is unchanged and is set out in the section below.

 

The Board's single, overarching principle governing capital allocation is a commitment to maintain a strong balance sheet and hold significant net cash balances at all times, providing a stable and firm foundation for the Group to make sound decisions for its long-term development, thereby enhancing its competitive advantage and future work winning.  This remained the case throughout the year. Net cash at the year-end was £355m (FY 2021: £358m) and the average daily net cash for the year was £256m (FY 2021: £291m). The year-end cash position included £46m held in jointly controlled operations or held for future payment to designated suppliers.

 

Operating cash flow for the year was an inflow of £48.0m (FY 2021: inflow of £117.6m), which included a working capital outflow of £64.5m. Significant movements within the operating cash flow included a net working capital increase in the Regeneration activities of £56.7m and an increase in contract assets in Property Services of £25.2m to fund growth as new projects mobilised.

 

Looking ahead, the Group expects that the average daily net cash for 2023 will be at a broadly similar level to that reported for 2022.

 

Building Safety

 

During the year, the Partnership Housing division signed the Developers Pledge (the "Pledge") with the Department of Levelling Up, Housing and Communities ("DLUHC") setting out the principles under which life critical fire-safety issues on buildings that they have developed of 11 meters and above are to be remediated. A letter was also received from DLUHC requesting information to assess whether it may be appropriate for Urban Regeneration to also commit to the principles of the Pledge as part of its commitment to support the remediation of historic cladding and fire safety defects over and above its obligations under the new Building Safety Act. A number of constructive meetings were subsequently held with DLUHC in the second half of the year to clarify matters with a view to codifying the agreed obligations into a legally-binding contract.

 

The final-form legal contract was issued in January 2023 and both Partnership Housing and Urban Regeneration have confirmed in writing to DLUHC their intention to sign and execute the contract on or before the stipulated date of 13 March 2023.  

 

A comprehensive review was completed during the year to identify legal and constructive obligations related to the Pledge, including the reimbursement of grants provided by the Building Safety Fund (the "BSF"). As a result of this review, provisions have been recognised in the year totaling £48.9m and these have been presented as exceptional charges due to their materiality and irregular nature. The charge does not include the benefit of any potential income subsequently received for recoveries from third parties and any such amounts would similarly be presented separately.

 

Of the total exceptional charge, £5.5m related to Partnership Housing and £43.4m related to Urban Regeneration.

 

Dividend

 

The proposed final dividend has increased by 10% to 68.0p per share (FY 2021: 62.0p), resulting in a total dividend for the year of 101.0p per share (FY 2021: 92.0p), also an increase of 10%. This represents dividend cover of 2.36x and reflects the result for the year, the strong balance sheet and the Board's confidence in the long-term prospects of the Group.

 

As part of the Capital Allocation Framework, the Board operates a formal dividend policy such that dividend cover is expected to be in the range of 2.0x-2.5x on an annual basis.

 

 

The Group's obligation to delivering economic, social and environmental value is reflected in its five Total Commitments: to health, safety and wellbeing, employee development, the environment, its supply chain, and local communities. These Commitments have been in place since 2008 and support the UN Sustainable Development Goals. Each Commitment has long term quantitative targets and KPIs set to monitor progress. The Group undergoes regular assessments covering all of its main stakeholder groups to ensure that its strategy continues to address its most material social and environmental matters and supports local communities. The next assessment will be undertaken in early 2023.

 

Subsequent to the year end in January 2023, the Group was awarded 'AAA' under MSCI's ESG ratings for a second consecutive year.

 

For full details, see the responsible business section of the 2022 annual report and our 2022 responsible business data sheet which will be published on 23 March 2023 on the Group's website (www.morgansindall.com).

 

(a)   Environmental

The Group continues to maintain its sector leadership status in addressing climate change. For the third year in a row, the Group achieved a grade 'A' score for its leadership on climate change from CDP and since 2010, all the Group's emissions have been independently verified.

 

In early 2021, the Group set its goal of achieving 'net zero' in its Scope 1¹, Scope 2² and operational Scope 3³ emissions by 2030. The Group's route to operational net zero is through reducing such emissions by 60% (based on its 2019 emissions) and offsetting its residual emissions by investing in UK-based projects. In 2022, the Group achieved a reduction of 4% in its Scope 1¹, Scope 2² and operational Scope 3³ emissions compared to 2021, resulting in a total 40% reduction compared to its 2019 baseline.  Based on its current trajectory, the Group is on track to achieve its targeted reductions by 2030.

 

Considerable progress has been made by the Group with its responsible offsetting projects. These include its investment in a 25-year project to create nine new woodlands on the Blenheim Estate in Oxfordshire.  As well as providing measurable, demonstrable gains in terms of absorbing and storing carbon, increasing biodiversity and improving soil, air and water quality, the woodlands will provide wellbeing benefits for people visiting the area.  

 

In addition, since the year end, the Group announced its participation in two other responsible offsetting projects: a peatland restoration programme to restore over 300 hectares of blanket bog in the Northern Pennines AONB and the Yorkshire Dales National Park; and the acquisition of 54 hectares of land to support the RSPB in unlocking and restoring additional land next to their existing Lakenheath Fen reserve in Norfolk. 

 

In addition to preventing further carbon loss from the degraded soils and storing future carbon, both projects will enable endangered species to recover, support a range of wildlife and provide people with vibrant places to visit.

 

Other activities by the Group in this area also include the ongoing investment in a scheme where carbon savings from energy-saving retrofits which the Group carries out for local authorities on social housing can be converted into carbon credits.  The local authorities can then either use these credits to offset unavoidable embodied carbon in future construction and regeneration projects or sell the credits to raise funding for further decarbonisation schemes.

 

The Group has set science-based targets for reducing carbon emissions and was one of the first construction companies globally to have its science-based emission targets officially accredited back in 2018. In 2022, the Group realigned its targets to a 1.5^oC scenario and submitted them to the Science Based Targets Initiative for revalidation. As part of this, the Group has now extended its net zero target to include the full total of its Scope 3⁴ emissions (ie not just operational Scope 3) by 2045.  This target is consistent with progress made to date and with the 2030 operational net zero target, which includes only operational Scope 3³ emissions.

 

Where possible, the Group integrates biodiversity into design decisions and measures the biodiversity net gain⁵ associated with projects. The Group also supports a circular economy by reducing waste, recycling, and reusing waste where appropriate. In 2022, 96% of the Group's waste was diverted from landfill and total waste reduced by 57%.

 

Other 2022 highlights and performance measures include:

·    Carbon intensity⁶ reduced to 4.5 from 5.3 in 2021

·    109 BREEAM, CEEQUAL, LEED, SKA or other industry-relevant sustainability ratings

·    65% of electricity purchased from renewable sources

·    Waste intensity⁷ reduced to 103.3 from 267.4 in 2021

 

(b)       Social

The Group works to deliver positive social and economic impacts that last long beyond the completion of projects by procuring locally where possible, collaborating with local community organisations to maximise volunteering and charity initiatives, and upskilling employees and local people to create economic resilience. The Group's value to its stakeholders lies in providing improved and efficient built environments and national infrastructure and its approach to and accountability for delivering high levels of social value to the communities in which it operates.

 

The Group's divisions pay the real living wage or above and two divisions are accredited Living Wage Foundation employers. During 2022, the divisions provided employees with a range of support to help with the cost of living, including offering one-off cost-of-living support payments, bringing forward annual pay and bonus payments, and enhancing employee benefit packages.

 

During the year, the Group has also supported local communities with the cost of living.  For example, through the HACT's Energy Hardship Fund, Property Services provided 570 energy vouchers to support social housing residents in paying their increasing energy bills. To date, Property Services has provided a total of 1,600 energy vouchers worth nearly £80,000 to 600 families in fuel poverty.

 

The Group continues to support the Supply Chain Sustainability School (SCSS) and encourages employees and supply chain partners to leverage its free training. The Group proactively engages with the supply chain regarding climate mitigation and seeks opportunities to help improve the performance of its suppliers. Over the year the Group has conducted, sponsored learning events, held workshops, and conducted site visits and audits to gather more information on how best to help suppliers.

The Group's relationships with its supply chain partners are of major strategic importance and the prompt payment of its suppliers remains a key component of this. Strong supply chain relationships can provide a competitive advantage and support superior operational delivery. For the formal Payment Practices Reporting period of 1 July 2022 to 31 December 2022, Construction & Infrastructure, the largest operating division by revenue, further reduced its average time taken to pay invoices at 24 days, with 99% of its invoices paid within 60 days. Fit Out reported its average time taken to pay invoices at 26 days, with 96% of invoices paid within 60 days, while Partnership Housing reported 32 days as its average time to pay, with 96% of its invoices being paid within 60 days. Property Services showed an average of 43 days to pay invoices, a deterioration of 2 days from the first half of the year (1 January 2022 to 30 June 2022) and with 97% of its invoices being paid within 60 days.

 

Ensuring its employees, suppliers and subcontractors have the tools and resources necessary to safely deliver for its clients and partners is fundamental to the Group. The senior health, safety and environment leaders across the Group increased their number of site visits by 29% in 2022 and the Group saw an improvement regarding serious injuries and high potential incidents. In the year, the number of RIDDOR⁸ incidents reduced to 28, down from 44 last year, while the lost time incident rate⁹ decreased to 0.22 compared to 0.29 last year. Continued focus is placed on driving down the number of accidents related to the use of hand tools and trips, which account for the majority of the RIDDOR incidents incurred.

 

The Group actively engages with its employees to hear their perspectives. Three of the Group's divisions have achieved accreditation from Investors in People, demonstrating a fulfilment of commitments to employees. Diversity is vital to the long-term success of the Group as it drives innovation and attracts the best employees. The Group maintains national partnerships with Women into Construction, Working Families/Working Mums, BPIC (Black Professionals in Construction) and Build Force UK. These networks help the Group to reach a wider audience and share information about the benefits of a career in construction.  In 2022, 25% of employees were female and 9% from an ethnic minority background. The Group's median gender pay gap for 2022 was 30.6% (2021: 29.6%).  This remains high and reflects a higher number of senior male employees in the Group. Women make up 11% (2021: 11%) of the upper pay quartile compared to 39% (2021: 39%) in the lower quartile. 

 

Some other performance measures and actions in this area include:

 

·    Employee voluntary turnover rate of 15.0% (2021: 13.0%)

·    535 (2021: 532) people sponsored to complete national vocational qualifications and professional qualifications

·    347 (2021: 275) directly employed apprentices and graduates sponsored

·    9,253 (2021: 9,620) number of hours of employees spent volunteering

·    4,779 (2021: 7,979) number of hours employees spent supporting schools

 

¹ Scope 1 emissions are direct emissions from owned or controlled sources.

² Scope 2 emissions are Indirect emissions generated from purchased energy.

³ Operational Scope 3 emissions are all indirect emissions not included in Scope 2 that occur in limited categories of the Group's value chain as measured by the Toitu carbon reduce scheme.

⁴ Scope 3 emissions are all emissions arising from the whole value chain from supply chain and end-users of buildings. Total emissions include carbon embodied in the materials (emitted during raw extraction, manufacture, transport to site, and disposal or recycling; carbon emitted during construction via energy use and waste; and estimated carbon emitted from operating the buildings for 60 years following handover to the client.

⁵ Biodiversity net gain is an approach to development, and/or land management, that aims to leave the natural environment in a measurably better state than it was beforehand.

⁶ Carbon intensity is measured as 'Carbon emissions (in tonnes) per £m revenue'.

⁷ Waste intensity is measured as 'Total waste (in tonnes) per £m revenue'.

⁸ RIDDOR is The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013.

⁹ Lost time incident rate is the number of incidents resulting in absence from work for a minimum of one working day, excluding the day the incident occurred per 100,000 hours worked.

 

 

Group outlook for 2023

 

While there remains significant macroeconomic uncertainty, the Group is well-placed to overcome the challenges of the coming year and also well-positioned to take advantage of the opportunities that arise in this type of environment.  There are early signs that inflation, particularly labour inflation, has plateaued and is starting to fall in some areas. The Group looks forward with optimism and although it is still early in the year, it is well-positioned to deliver a result for 2023 which is in line with its current expectations.

 

The 2023 outlook for each division is detailed in the Divisional Review.

 

Medium-term divisional targets

 

To provide a framework for future performance, each division operates to a medium-term financial target or set of targets (the 'target' or 'targets') and are referred to in the Business review.

 

The targets were originally set in February 2022 and are shown below together with the actual FY 2022 performance measured against these targets. The medium-term target for Fit Out has been upgraded as of February 2023 to reflect current performance, its market position and its future prospects.

 

Division	Target	Actual FY 2022
Construction	Operating margin of 2.5% - 3% pa Revenue of £1bn	Operating margin of 2.8% Revenue of £808m
Infrastructure	Operating margin of 3.5% - 4.0% pa Revenue of £1bn	Operating margin of 3.9% Revenue of £761m
Fit Out	Average annual operating profit through the cycle of £45m-£50m (was £40m-£45m)	Operating profit of £52.2m
Property Services	Operating profit of £15m	Operating profit of £4.3m
Partnership Housing	Operating margin of 8% / return on capital up towards 25%	Operating margin of 5.4% / return on capital of 19%
Urban Regeneration	3-year rolling average return on capital up towards 20%	3-year rolling average return on capital of 13%

 

 

 

The following Divisional Review is given on an adjusted basis unless otherwise stated. Refer to Note 15 of the consolidated financial statements for appropriate reconciliations to the comparable UK IAS measures.

 

Headline results by division

 

	Revenue		Operating Profit		Operating Margin
	£m	Change	£m	Change	%	Change
Construction & Infrastructure	1,569	+3%	52.1	-10%	3.3%	-50bps
Fit Out	968	+22%	52.2	+18%	5.4%	-20bps
Property Services	163	+22%	4.3	+5%	2.6%	-50bps
Partnership Housing	696	+22%	37.4	+13%	5.4%	-40bps
Urban Regeneration	244	+20%	18.9	+56%	n/a	n/a
Group/Eliminations	(28)		(25.7)
Total	3,612	+12%	139.2	+6%	3.9%	-20bps

 

Group secured workload¹ by division

 

The Group's secured workload¹ at 31 December 2022 was £8,459m, a decrease of 2% on the prior year end (FY 2021: £8,614m) and 1% lower than at the half year (HY 2022: £8,519m).

 

The divisional split is shown below.

 

	FY 2022	FY 2021	Change
	£m	£m
Construction & Infrastructure	2,601	2,715	-4%
Fit Out	841	897	-6%
Property Services	1,204	945	+27%
'Construction' secured order book2	4,646	4,557	+2%
Partnership Housing	1,984	1,498	+32%
Urban Regeneration	1,847	2,574	-28%
'Regeneration' secured order book2	3,831	4,072	-6%
Inter-divisional eliminations	(18)	(15)
Group secured workload1	8,459	8,614	-2%

 

¹     The Group secured workload is the sum of the Construction secured order book and the Regeneration secured order book, less any inter-divisional eliminations

 

²   The 'Secured order book' is the sum of the 'committed order book', the 'framework order book' and (for the Regeneration businesses only) the Group's share of the gross development value of secured schemes (including the development value of open market housing schemes) 

 

The 'committed order book' represents the Group's share of future revenue that will be derived from signed contracts or letters of intent.  The 'framework order book' represents the Group's expected share of revenue from the frameworks on which the Group has been appointed.   This excludes prospects where confirmation has been received as preferred bidder only, with no formal contract or letter of intent in place.

 

 

Construction & Infrastructure
	FY 2022	FY 2021			Change
	£m	£m
Revenue	1,569	1,520			+3%
Operating profit	52.1	58.1			-10%
Operating margin	3.3%	3.8%			-50bps

 

Construction & Infrastructure delivered a steady performance in the year, with both the Construction and Infrastructure (including Design)¹ achieving operating margins well within their respective medium-term target ranges (see section 'Outlook - medium-term divisional targets' above) despite the inflationary headwinds and supply chain issues experienced across the year.

 

Divisional revenue increased 3% to £1,569m (FY 2021: £1,520m), while operating profit was down 10% to £52.1m (FY 2021: £58.1m). The operating margin was 3.3%, down 50bps against the strong prior year comparator (FY 2021: 3.8%).

 

Of the divisional revenue split by type of activity, Construction accounted for 51% of divisional revenue at £808m, with 49% being Infrastructure¹ at £761m. 

 

Key to performance is risk management and the division maintained its focus on disciplined contract selection and operational delivery throughout the year. Contract by procurement-type consisted mainly of negotiated work, two-stage tendered work or work procured through frameworks. The public and regulated sectors, which together accounted for c75% of revenue in the year, remained positive with most clients indicating that committed spending on capital projects remained in place. In turn, the division's order book also remains of high-quality work, with the secured order book at the year end at £2,601m, 4% lower compared to the prior year (FY 2021: £2,715m).

 

(i)     Construction

 

Construction's revenue increased 16% to £808m (FY 2021: £694m), while operating profit increased 3% to £22.6m (FY 2021: £21.9m).

 

The continued focus on improving operational delivery and prudent risk management all contributed towards achieving an operating margin of 2.8% (FY 2021: 3.2%).

 

The order book at the year end was £802m, a reduction of 1% on the prior year (FY 2021: £810m) and up 6% from the half year position (HY 2022: £760m). Of the total, £646m (81% by value) is secured for 2023. This compares to £599m of work which was secured for the year ahead at the start of last year.

In addition to the total order book, Construction also had £758m of work at preferred bidder stage at the year-end, 41% higher than the equivalent amount at the same time last year (FY 2021: preferred bidder £537m).

 

In education, project wins included the £63m redevelopment of King Henry VIII Secondary School in Abergavenny into a 1,900-place, all-through school for Monmouthshire County Council, with enabling works completed in October; and Buntingford First School (£10.0m) which will be Hertfordshire's first carbon-neutral primary and nursery school and built to Passivhaus standards. In addition, Construction was awarded a £15.1m contract to refurbish an existing bank headquarters to create the Leeds Mathematics School, a 240-place sixth form college, for the Department for Education.

Completions in the year included the £49.8m 100% electric-powered SEE Building (Science, Engineering and Environment) and the £8.3m NERIC Building (North of England Robotics Innovation Centre) for the University of Salford; the £32.4m Glebe Farm School in Milton Keynes, the area's first fossil-free school; the £13.9m Renton Primary School in West Dunbartonshire; the £7.8m Ravensdale Primary School in Derby; and a £5.6m two-storey teaching block at Horsforth School in Leeds which provided 365 additional places.

 

In healthcare, Construction was awarded the £11.9m Priscilla Bacon Hospice, a new state-of-the-art facility on an eight-acre site in Norwich; and, via the Pagabo framework, a £14.5m project to deliver a new imaging centre at Milton Keynes University Hospital.

 

In other sectors, Construction was awarded, in partnership with Urban Regeneration, the development of two new, Grade A office buildings in Birkenhead, totalling £40m in project value and on track for completion in 2023. Work progressed at Spinnaker View, an affordable homes development in Gosport for older people with care and support needs, being delivered with Partnership Housing; a £109.9m 34-story mixed-use development at Manor Road in Canning Town, in partnership with Urban Regeneration; and a new car park and cycle hub at North Manchester General Hospital. Work completed during the year on the £23.3m Great Yarmouth Marina Centre.

 

Framework appointments included a place on the £9bn Procure 23 framework, a partnership between Crown Commercial Services and NHS England and Improvement (NHSE&I); Lot 1 (£8m - £25m) and Lot 2 (>£25m) of the North West Construction Framework; and construction projects valued between £250k and £10m on the £1bn Pagabo Medium Works Framework (the division's third appointment to this framework).

 

(ii)       Infrastructure¹

 

As expected, Infrastructure's revenue was 8% lower at £761m (FY 2021: £826m) with operating profit of £29.5m, 19% lower than last year's strong performance (FY 2021: £36.2m), driven mainly by the timing and nature of projects delivered through its frameworks. This balance of work resulted in an operating margin of 3.9% (FY 2021: 4.4%).

 

Infrastructure's order book at the year end was £1,799m, down 6% on the previous year end (FY 2021: £1,905m), however was up 1% on the half year position (HY 2022: £1,775m). In excess of 90% of the value of the order book is derived through frameworks, consistent with the strategic focus on long-term workstreams from its clients. 

 

The focus for the division remained on its key sectors of highways, rail, nuclear, energy and water.

In highways, Infrastructure was awarded the A45 at Great Doddington, its first project on National Highways' new Scheme Delivery Framework, a £3.6bn, six-year programme to deliver vital renewals to maintain safety and reliability. Work continued on the A11 as part of National Highways' Concrete Roads Programme - Reconstruction Works Framework, a four-year programme worth c£130m to repair or replace the concrete surface of motorways and major A roads in England; and National Highways' Lower Thames Crossing scheme, where Infrastructure is part of a joint venture delivering the Integration Partner contract. Works completed in the year included the M27 Junctions 4 to 11 smart motorway upgrade; the A45 Sprint corridor for Transport for West Midlands, a c£40m scheme forming part of a bus priority corridor linking Walsall with the centre of Birmingham, Solihull and Birmingham Airport; and the installation of safety technology to detect stopped vehicles on motorways without a hard shoulder, delivered through the Smart Motorway Alliance with National Highways.

 

In rail, Infrastructure secured several schemes with Network Rail: the Bangor to Colwyn Bay signalling power upgrade; a £7.5m project on the CP6 Wales and Western framework; Lot 1 of the Building and Civils Framework, which involves renewing structural assets within Network Rail's Western region as part of their CP7 programme; and the detailed and temporary works design for the refurbishment of Liverpool Street Station roof, procured through SCAPE's Construction Framework. In addition, the division secured the Surrey Quays station upgrade, a £40m contract awarded through the London Rail Infrastructure Improvement Framework. Work progressed on the Northumberland Line extension project for Northumberland County Council; the Network Rail Parsons Tunnel rockfall shelter extension in Devon; several access-for-all schemes with Merseyrail; and the project to upgrade Slough Crossrail station as part of Network Rail's CP6 framework in the Western region. During the year, the division completed the Central Area enabling works for HS2 and the Barking Riverside Extension project for Transport for London.

 

In nuclear, work continued on Sellafield's £1.6bn Programme and Project Partners contract, in its third year of a 20-year framework, and on the Infrastructure Strategic Alliance. Work continued on the D58 facility for BAE Systems and completed on the D59 facility.

 

In energy, National Grid awarded Infrastructure the £112m Dinorwig scheme and the £9.2m ZZA overhead line route as part of the RIIO-2 electricity construction EPC (Engineer, Procure and Construct) framework, which involves the construction, refurbishment and decommissioning of overhead line and underground cable systems operating between 33kV to 400kV across its transmission network. In addition, the division was awarded a place on Scottish & Southern Electricity Network's (SSEN) RIIO-2 framework for an initial term of five years with an option to extend by two years. The framework involves the construction, refurbishment and decommissioning of overhead lines, underground cable systems and substations operating between 33kV to 400kV across SSEN's transmission network. Energisation (transferring energy into the grid) was completed on the Dorset and Peak East Visual Impact Provision (VIP) schemes for National Grid.

 

In water, tunnelling was completed on the Thames Tideway 'super sewer' project to expand London's sewer network and help prevent pollution in the Thames, while work continued as part of the long-term AMP7 framework with Welsh Water.

 

In the BakerHicks design business¹, projects completed in the year included: the newly refurbished Whitechapel Station as part of the Crossrail scheme in London; the Dorset Visual Impact Provision (VIP) underground cabling scheme for National Grid; an onshore HVDC convertor station as part of National Grid's IFA2 scheme linking the UK and French electricity systems; Ulster Hospital's Acute Services Block; Clydebank Health and Care Centre for NHS Greater Glasgow and Clyde; Renton Primary School in West Dunbartonshire; two Community Custody Units for Scottish Prison Services, in Maryhill, Glasgow and Dundee; the Medicines Manufacturing Innovation Centre (MMIC) in Renfrewshire; and a large-scale cell culture production facility in Vienna. Work continued on the multi-disciplinary design for Scottish Prison Services' new HMP Highland in Inverness; Engineering, Procurement and Construction management (EPCm) services for a new state-of-the-art, fill-finish drug manufacturing facility; and civil and structural engineering services for the £42.5m Allander Health and Leisure Centre in Bearsden, East Dunbartonshire.

 

Divisional outlook for Construction & Infrastructure

 

The medium-term target for Construction is maintaining its operating margin within the range of 2.5%-3.0% per annum while increasing revenue to £1bn per annum. Infrastructure's medium-term target is to maintain its operating margin within the range of 3.5%-4.0% per annum while also increasing revenue to £1bn per annum.

 

Based upon the timing of orders and projects, both Construction and Infrastructure are expected to make positive progress towards their revenue targets in 2023, whilst also maintaining their margins within their target ranges.  

 

¹ Design results are reported within Infrastructure

 

Fit Out
	FY 2022	FY 2021			Change
	£m	£m
Revenue	968	795			+22%
Operating profit	52.2	44.2			+18%
Operating margin	5.4%	5.6%			-20bps

 

Fit Out delivered another excellent performance in the year which was again driven by strong and consistent project delivery, a high-quality workload and a continued focus on enhanced customer experience. Revenue increased 22% to £968m (FY 2021: £795m) while operating profit increased 18% to £52.2m (FY 2021: £44.2m), a record result for the division, resulting in a strong operating margin of 5.4% (FY 2021: 5.6%).

 

During the year, there was no significant change to the overall balance of the business compared to previous years. The commercial office sector contributed 73% of revenue (FY 2021: 76%), with work in the public sector and for local authorities dropping back only slightly to 12% of revenue (FY 2021: 16%) offset by an increase in higher education work to 11% (FY 2021: 7%). The retail banking sector made up the remainder.

 

Similarly, the geographical spread of the business remained broadly similar to the prior year, with the London region accounting for 60% of revenue (FY 2021: 58%).

 

In terms of type of work delivered in the year, there was a slight shift towards traditional fit out work, up to 87% of revenue (FY 2021: 80%), however this was not indicative of any longer-term trends. 'Design and build' work made up the remainder at 13% of revenue (FY 2021: 20%).

 

The proportion of revenue generated from the fit out of existing office space increased to 83% (FY 2021: 78%), with the fit out of new office space reducing to 17% (FY 2021: 22%). Of the fit out of existing office space, work was broadly split evenly between refurbishment 'in occupation' and non-occupied space. Again, such movements are not viewed as material.

 

At the year end, the secured order book was £841m, a sizeable workload albeit a reduction of 6% from the previous year end (FY 2021: £897m). Importantly of this total, £591m (70%) relates to 2023 and this level of orders for the next 12 months is 12% higher than it was at the same time last year.

 

In addition to these secured orders, the division had over £100m of work in the pre-contract 'preferred bidder' stage at the year end, as well as in excess of £300m of work already tendered and pending a decision and over £200m of work at the tender stage. The average value of enquiries received through the year was around £3m.

 

Traditional office fit out projects won in the year included: 360,000 sq ft for Marsh McLennan in London; Shell UK's 250,000 sq ft Waterloo HQ; 250,000 sq ft for the relocation of a global financial organisation to Paddington; 150,000 sq ft HQ for GSK in London's Life Sciences hub, known as the Knowledge Quarter; 110,000 sq ft for a professional services firm in London; and 80,700 sq ft for ROKU Europe in Manchester.

 

Project completions included: 366,000 sq ft for the European Bank for Reconstruction and Development (EBRD) in Canary Wharf; 200,000 sq ft for BP in the North Colonnade in Canary Wharf; 141,000 sq ft for Boston Consulting Group in London; 57,000 sq ft for International Hotel Group in Windsor; 50,000 sq ft for Convene in Bishopsgate, London; 20,000 sq ft for CBRE Investment Management in London; 17,000 sq ft for Tarmac in Birmingham; 13,300 sq ft for euNetworks in London; and projects for the BBC in Newcastle and the Cambridge Design Partnership in Cambridge.

 

In higher education, projects won and on site during the year included: the 19,000 sq ft fit out of a laboratory and workspace at Queen Mary University's Francis Bancroft building; 25,000 sq ft for Coventry University that included a laboratory refurbishment; three projects for University College London totalling £40m; an £8m fit out and refurbishment of Middlesex University's West Stand at StoneX Stadium; and the fit out of the School of Health at Leeds Beckett University.

 

In commercial design and build, significant wins included: a 50,145 sq ft fit out for IMG Media in Stockley Park; KAO Corporation's new 11,500 sq ft London office; 10,000 sq ft for Navico at The Boathouse in Southampton; 8,000 sq ft for The Gibson Garage in London, the first dedicated office and retail experience for Gibson's guitar and music fans outside of the US; and the 2,500 sq ft HQ for Teck Resources in St James Square, London.

 

Design and build projects completed in the year included: Montagu Private Equity's new office in London; Hutchinson 3G UK/Three's new 117,000 sq ft workspace in Reading; and a 180,000 sq ft Cat A fit out at Campus Reading, one of the largest office developments in the UK.

 

Projects delivered through public sector frameworks and corporate partnerships included: an 86,000 sq ft office fit out for the Government Property Agency in Peterborough; £39m of works for the Mayor's Office for Policing and Crime (MOPAC), with a future order book of £22m; 39 projects won through Fit Out's partnership with NatWest Group; 10 projects for commercial landlord GPE to deliver 50,000 sq ft of high-quality lettable office space across London; and a 60,000 sq ft fit out for the University of Leicester via the Pagabo framework. Also via Pagabo, work continued at Nottingham Central Library for Nottingham City Council.

 

Divisional outlook for Fit Out

 

Fit Out's medium-term target has been upgraded as of February 2023 to reflect the division's current performance, its market position and future prospects and it is now expected to deliver average annual operating profit through the cycle of £45m-£50m.

 

The division exceeded this target in 2022 and based on the timing of projects in the order book and the current visibility the division has of future workload for the first half, Fit Out is again expected to be slightly ahead of the top end of this new target in 2023, at broadly similar levels to 2022.

 

Property Services
	FY 2022	FY 2021			Change
	£m	£m
Revenue	163	134			+22%
Operating profit1	4.3	4.1			+5%
Operating margin1	2.6%	3.1%			-50bps

 

  ¹  before intangible amortisation of £2.0m (FY 2021: £1.5m)

 

Property Services improved its performance in the period, with revenue increasing 22% to £163m (FY 2021: £134m) and operating profit¹ increasing 5% to £4.3m (FY 2021: £4.1m). Its operating margin¹ was lower at 2.6% (FY 2022: 3.1%).

 

The significant revenue growth was primarily driven by the addition of new contracts being mobilised in the year. Specifically, three new integrated contracts worth a total of £380m commenced operations in the year: a 10-year contract with South East housing association, Moat, to provide services to 11,500 homes across south east London, Kent, Essex and Sussex, worth over £200m and with the potential to be extended by a further five years; an £80m contract with Longhurst Group, maintaining 6,500 homes in their East region for up to 10 years; and a 10-year contract with Welwyn Hatfield Borough Council, delivering maintenance and planned works for 9,500 homes, worth £120m.

The addition of these new contracts provides a run-rate entering 2023 at which the division has sufficient critical mass to support the operating model and drive the focus on improved contract performance.   

 

Notwithstanding the increase in revenue, however, operating profit and operating margin were both adversely impacted by inflationary pressures on labour, materials and other general costs. Due to the significant time lag between such cost increases experienced and the timing of annual inflation-uplift mechanisms in client contracts, the division was unable to recover any such increases in the year and absorbed the full impact on most of its responsive maintenance contracts. Operationally, availability of industry resource was also a continuous challenge throughout the year, which further impacted efficiency of contract delivery.

 

Strategically, the division remains focused on delivering repairs and planned maintenance with a strong social value offering, servicing public sector housing through its integrated contracts with housing associations and local authorities. At the year end, the secured order book was £1,204m, up 27% from the prior year end (FY 2021: £945m). Of this total, in excess of 85% is for 2024 and beyond.

 

During the year, the division's data collection technology, goldeni, which was launched in 2021, was installed in hundreds of social homes. Its sensors pick up data on temperature, humidity and air quality to identify properties that may be susceptible to damp or mould, so that corrective action can be taken. In Basildon, 25 homes piloted new boiler sensors which send out alerts for any urgent repairs needed before the resident is even aware. The boiler programme will be expanded in 2023. Also planned for 2023 is a pilot scheme in St Albans where goldeni sensors will be used to test the effectiveness of energy efficiency works.

 

Divisional outlook for Property Services

 

The medium-term target for Property Services is £15m operating profit per annum.

 

As above, the 2022 result was significantly impacted by inflation in the cost base. For many of the division's responsive maintenance contracts, the annual retrospective inflation-uplift mechanisms will be applied to future pricing from the second quarter of 2023 onwards. The impact of this is expected to drive a significant uplift in profitability in 2023 and progress made towards its medium-term target. 

 

Partnership Housing
	FY 2022	FY 2021			Change
	£m	£m
Revenue	696	572			+22%
Operating profit1	37.4	33.2			+13%
Operating margin 1	5.4%	5.8%			-40bps
Average capital employed1,2 (last 12 months)	197.3	155.8			+£41.5m
Capital employed1,2 - at year end	189.3	155.6			+£33.7m
ROCE1,3 (last 12 months)	19%	21%

 

Partnership Housing delivered a strong operational performance in the year with good strategic progress made across the business.

 

Revenue for the year was up 22% to £696m (FY 2021: £572m). Split by type of activity, Mixed-tenure revenue was up 15% to £371m (53% of divisional revenue) while Contracting revenue (including planned maintenance and refurbishment) increased by 31% to £325m (47% of divisional total).

 

Operating profit¹ increased 13% to £37.4m (FY 2021: £33.2m), resulting in an operating margin¹ of 5.4% (FY 2021: 5.8%) with the margin reduction in part reflecting the dilutive impact of the slight change in business mix towards lower-margin Contracting activities.   

 

The division had a successful year of winning high-quality work, providing good visibility of longer-term workstreams through its partnerships. The secured order book at the year end was £1,984m, an increase of 32% on the prior year end (FY 2021: £1,498m) with 60% of its total value for 2024 and beyond.

 

The ROCE^1,3 for the year was 19%, based upon the average capital employed^1,2 for the last 12-month period of £197.3m. The capital employed^1,2 at year end was £189.3m, an increase of £33.7m from the prior year end. In 2023, the average capital employed^1,2 is expected to increase up towards c£250m, reflecting the increased scale of the business and stage of developments.

 

Mixed-tenure

 

Increasing the number and size of mixed-tenure sites continues to be a key aspect of the division's growth strategy. Significant progress has been made in this area, with currently a total of 58 mixed-tenure sites at various stages of construction and sales (up from 48 at the prior year end), and an average of 157 open market units per site (up from 143 at the prior year end). Average site duration is 48 months, providing long-term visibility of activity.

 

During the year, 1,936 units were completed across open-market sales and social housing (including through joint ventures) compared to 1,653 units in 2021. The average sales price of £258k compared to the prior year average of £249k. Of the open-market units, a reduction in sales activity during the fourth quarter of the year was experienced in line with the rest of the UK housing industry. 

 

Of the total divisional order book, the amount relating to the Mixed-tenure activities increased 29% to £1,279m (FY 2021: £992m). In addition, the amount of mixed-tenure business in preferred bidder status or already under development agreement but where land has not been drawn down was over £500m at the year end.

 

Partnership Housing increased its portfolio of long-term joint ventures during 2022. The division formally executed a 15-year joint venture with Suffolk County Council with an initial five sites (2,800 homes) immediately under option. Preferred bidder status was achieved with Peabody Developments for the next two phases of its major regeneration programme at Thamesmead totalling 750 new homes.  In addition, Partnership Housing has been selected as preferred bidder by Scarborough Council for their 30-year 'Better Homes' joint venture, with initial sites identified to deliver over 700 new homes in the Scarborough area. Scarborough Council will be part of the new North Yorkshire Unitary Council from April 2023, which would be the contracting authority.

 

Planning permission was secured for the first scheme of Partnership Housing's joint venture with West Sussex County Council, with works anticipated to start on site in 2023. Compendium Living, the division's joint venture with The Riverside Group, began work during the year on two further phases worth £35m, at Ings in Hull and Castleward in Derby. Work also started on the development of 163 units at the site of the former Philips factory in South Lanarkshire and 766 units on an additional phase of the One Woolwich Programme in London. The division legally completed the purchase of a 398-unit site in Queensferry, Edinburgh with the majority of units affordable homes or forward sold to Sigma Homes as private-for-rent.

 

Elsewhere, progress continued on other mixed-tenure schemes, in partnerships with Riverside, Clarion Housing, Trafford Housing Trust, Together Housing Group, Repton Property Developments (owned by Norfolk County Council), the Borough Council of Kings Lynn & West Norfolk, Flagship Group, Pobl Group and Homes England.

 

Contracting

 

In Contracting, the total number of equivalent units built was 2,010, up from 1,477 in the prior year.

 

Of the total divisional order book, the Contracting secured order book was 39% higher at £705m (FY 2021: £506m), of which £357m is for 2023.  

 

Key contracting schemes awarded in the year included: a £17m scheme in Stockton in conjunction with sister division, Urban Regeneration; a £70m project at Gallions 3B, Newham for Notting Hill Developments Ltd; a  £30m, 143-unit scheme at Barne Barton, Plymouth for Clarion Housing; a £15m, 90-unit scheme for Saffron Housing Trust on the old Wymondham Rugby Club site in South Norfolk; and the £20m, 124-unit Chartist Garden Village scheme in Pontllanfraith for Pobl Group. Work started on the final phase of development at The Mill in Cardiff and an £11m refurbishment scheme at The Lakes in Oldbury for Sandwell Metropolitan Borough Council, which will transform five low-rise residential buildings into modern social accommodation for rent.

 

Divisional outlook for Partnership Housing

 

Partnership Housing's medium-term targets are; firstly, to generate a return on average capital employed³ of up to 25% and secondly, to deliver an operating margin of 8%.

 

Looking ahead, although its focus on long-term partnerships with the public sector provides a reasonable level of forward visibility and resilience, the economic headwinds and general uncertainty in the housing market will inevitably impact on the division's financial performance.

 

Current expectations are that the division will deliver materially lower profit in 2023 compared to 2022, with both its medium-term target measures of operating margin and ROCE also expected to be significantly lower in the year. Despite this, however, the medium-term targets remain valid and unchanged and the strategic development and investment in the business will continue to progress as planned.   

¹   Before exceptional Building Safety charge of £5.5m

² Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total liabilities (excluding corporation tax, deferred tax, inter-   company financing and overdrafts)

³ Return On Average Capital Employed = (Adjusted operating profit plus interest from JVs) divided by average capital employed

Urban Regeneration
	FY 2022	FY 2021			Change
	£m	£m
Revenue	244	203			+20%
Operating profit1	18.9	12.1			+56%
Average capital employed1,2  (last 12 months)	96.5	98.7			-£2.2m
Capital employed1,2 at year end	100.4	84.0			+£16.4m
ROCE1,3 (last 12 months)	20%	13%
ROCE1,3 (average last 3 years)	13%	12%

 

Urban Regeneration made good progress with its long-term regeneration schemes, delivering a significant uplift in activity and performance in the year. Operating profit¹ of £18.9m was an increase of 56% on the prior year (FY 2021: £12.1m), while the ROCE^1,3 in the year increased to 20%, based on the average capital employed^1,2 in the year of £96.5m.

 

Key contributors to performance were profit and development fees generated from Lewisham Gateway, London and New Victoria, Manchester, developments which were both subject to forward funding deals signed in 2020; and the sale of 166 homes across the portfolio, including 115 sales at Atelier, Salford, delivered by The English Cities Fund (a joint venture with Legal & General and Homes England). The operating result also included a charge of £4.3m relating to building remediation costs which arose in the ordinary course of business and are not within the scope of the exceptional Building Safety charge (see Group Operating Review section). 

 

Of the division's active long-term regeneration schemes, construction progress was made with the final phase of Lewisham Gateway which will deliver 649 homes for rent, c25,000 sq ft of retail space, c15,000 sq ft of food and beverage space, 10,000 sq ft of offices and Lewisham's first major multiplex cinema, pre-let to Empire Cinemas. Work also continued at New Victoria, Manchester to deliver 520 homes for rent on a 450,000 sq ft, formerly unused site next to Manchester Victoria train station, due to complete in 2023; 106 homes at Islington Wharf in Manchester, through the division's Waterside Places joint venture with the Canal and River Trust; 113 affordable homes at Northshore in Stockton-on-Tees; a 64,000 sq ft office building and 399-space multi-storey car park at Stockport Exchange; two office buildings totalling 150,000 sq ft in Birkenhead, pre-let to Wirral Council; and a 144-bedroom Holiday Inn hotel in Blackpool.

 

In addition, a number of new schemes and phases commenced. Construction began in 2022 on One City Park, a 56,000 sq ft office building in Bradford city centre; the final phase at Hale Wharf, Tottenham Hale, to deliver a further 191 affordable homes for Haringey Council; and Forge Island, a new leisure destination in Rotherham town centre that will provide a boutique cinema, Travelodge hotel and six independent restaurants.

 

Completions in the year included the final 100,000 sq ft units at Logic Leeds, bringing the 15-year regeneration scheme to an end; 211 homes for sale at the Novella apartment development in Manchester; 34 homes (30 affordable) handed over as part of the 75-home Brixton Centric in partnership with Lambeth Council and Notting Hill Genesis housing association; and 44 homes at West Cliff Mansions, Bournemouth, through the Bournemouth Development Company joint venture with BCP Council.

 

Several developments within The English Cities Fund (ECF) joint venture were active during the year, including Four New Bailey, Salford, where a 20-year pre-let had been signed with BT for 175,000 sq ft of Grade A office space; and the Eden building at New Bailey, a 115,000 sq ft, speculative office building, designed to be carbon neutral in operation and featuring Europe's largest living wall (43,000 sq ft), which is due to complete in 2023. Planning consent was secured for a new 22-storey, 196-apartment building for rent in Salford Centre; and for the regeneration of St Helens and Earlestown town centres in partnership with St Helens Borough Council, which will create new homes, transport infrastructure and public spaces. The £2.5bn, 240-acre, mixed-use regeneration of Salford Crescent also progressed with planning consent obtained to deliver Salford Rise, a 90m, green boulevard that will connect communities in Salford with new opportunities generated by Salford Crescent.

 

Early-stage progress has also been made on a number of schemes. Plans are progressing following a public consultation on Horsham Enterprise Park, a sustainable new neighbourhood for Horsham, which will provide 270,000 sq ft of commercial space, up to 300 high-quality homes and extensive improvements to public spaces. The division will be working together with Partnership Housing on the residential element. Plans are also being prepared for submission following a public consultation exercise for Weston M6, a £176m, 1.3m sq ft employment park near the HS2 interchange in Crewe; and for the revitalisation of Prestwich in partnership with Bury Council, to create a new heart in the village centre with wellbeing spaces, new homes, a community hub and public realm.

 

In the second half of the year, the division was selected as development partner for Arden Cross, Solihull, a £3bn scheme to create an internationally connected, 346-acre city district including up to 6m sq ft of commercial development, up to 3,000 homes, key transport infrastructure and large areas of public space. The development agreement is set to be signed in 2023, followed by a master-planning and public consultation exercise. Arden Cross will take approximately 20 years to complete.

 

The active development portfolio of schemes includes 16 projects on site at the year end, totalling £1,215m gross development value⁴, with a further 5 projects, with a gross development value⁴ of £334m, expected to start on site in 2023.

 

At the year end, the order book was £1,847m, a reduction of 28% on the prior year end and is long-term in nature with over 70% of its value for 2025 and beyond. As the division's new business pipeline tends to be large scale schemes which can take a significant time to bid, any short-term movements in the order book are not considered to be representative of future workload. No value is yet taken in the order book for Arden Cross.

 

The order book retains a diverse regional and sector split:

 

·    by value, 42% is in the North West, 46% in London and the South East, 10% in Yorkshire and the North East and 2% in the rest of the UK: and

·    by sector, 49% by value relates to residential, 29% to offices, 13% to industrial with the remainder broadly split between retail and leisure.

 

Divisional outlook for Urban Regeneration

 

Based upon the current profile and type of scheme activity across the portfolio, the average capital employed^1,2 for 2023 is expected to be c£100m.

 

The medium-term target for Urban Regeneration is to increase its rolling three-year average ROCE^1,3 up towards 20%. 2022 delivered a ROCE^1,3 of 20% and a broadly similar performance is expected in 2023.

¹   Before exceptional Building Safety charge of £43.4m

² Capital employed is calculated as total assets (excluding goodwill, intangibles and cash) less total liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts)

³ Return On Average Capital Employed = (Adjusted operating profit plus interest from JVs) divided by average capital employed

⁴ Includes projects delivered through joint ventures at 100% of the project value to the JV

 

 

 

The Board's single, overarching principle governing capital allocation is a commitment to maintain a strong balance sheet and to hold significant net cash balances at all times.

 

In support of this principle, the Group's capital allocation framework comprises:

 

·     Maintaining balance sheet strength to enhance our competitive advantage and win future work

 

Fundamental to the Group's organic strategy is engaging in long term partnerships with its public and private sector clients, whether it be through joint ventures or other arrangements in its Regeneration activities, or through frameworks in its Construction activities.

 

When assessing the suitability of long-term partners, potential clients are increasingly looking for security and assurance of long-term solvency and the availability of cash resources to ensure their partners can fulfil their long-term contractual obligations. A strong balance sheet and significant levels of net cash are considered by the Group as a market differentiator and a competitive advantage when bidding and winning future work to support the future growth of the business.

 

·     Ensuring downside protection - maintaining a 'buffer' in the event of a macro downturn

 

Maintaining significant levels of net cash is considered as key to offsetting any potential consequence of a future downturn in the economy and reduction in revenue in the Construction activities of Construction & Infrastructure and Fit Out.

 

These activities operate with a negative working capital model, which in turn can lead to cash outflows in the event of declines in revenue. Maintaining a net cash 'buffer' therefore allows the Group to continue with its strategy of disciplined contract selectivity and prudent approach to risk management throughout the whole economic cycle.

 

·     Maximising investment in the current business to drive growth

As detailed in the Group Strategy section above, the Group's capabilities are aligned with sectors of the UK economy which are expected to see increasing opportunities in the medium to long term and which support the UK's current and future regeneration and affordable housing needs, as well as being well positioned to meet the demand for ongoing investment in the UK's physical and social infrastructure. Consequently, significant opportunities are expected to arise through the medium and long-term to invest in the business to support and accelerate the organic growth of these activities. 

Specifically, investment in the regeneration activities is a strategic priority:

Ø For Partnership Housing, the growth potential remains substantial. The new and upgraded medium-term target is for an operating margin of 8% and for return on capital to be up towards 25% on an annual basis. These investment returns are targeted for its next phase of growth and the scalability of the partnership housing model provides the potential to significantly increase the capital employed above current levels over the medium to long term.

 

Ø Within Urban Regeneration, its development activities across multi-phase sites and mixed-use regeneration are targeted to generate an average return on capital of up to 20% on a three- year basis over the medium term.  Based on the identified pipeline of future opportunities as well as the investment profile of schemes already secured, the capital employed in the division is expected to increase over the medium term.

 

Within the overall investment programme for the Regeneration activities, the Group may occasionally identify opportunities to complement the existing growth strategy by acquiring pre-existing development schemes or positions in existing schemes from third parties.  Any such acquisition opportunities would only be considered where they would accelerate the strategic growth through the Group's existing divisional structure and capabilities.

 

·        Maintaining an attractive dividend policy

 

Dividends are considered by the Board to be an important component of shareholder returns. The Board has formally adopted a dividend policy such that dividend cover is expected to be in the range of 2.0x-2.5x on an annual basis.

 

This capital allocation framework is designed to balance the needs of all stakeholders whilst enhancing the Group's market competitiveness and capabilities and maintaining its financial strength. The Board will prioritise attractive investment opportunities in the business to support and accelerate growth, generate the best returns for shareholders and ensure the continued support of the ordinary dividend. The Board will continue to assess the needs of the business and the optimum balance sheet structure within the context of the principle and framework described above, and any capital then deemed surplus above these requirements may be returned to shareholders.

 

 

Other Financial Information

 

1. Net finance expense.  The net finance expense was £3.0m, a reduction of £0.6m compared to FY 2021 and which is broken down as follows: 

 

	FY 2022	FY 2021	Change
	£m	£m	£m
Interest income on bank deposits	2.2	-	2.2
Amortisation of bank fees & non-utilisation fees	(2.2)	(2.5)	0.3
Interest expense on lease liabilities	(1.9)	(1.5)	(0.4)
Interest from JVs	-	0.6	(0.6)
Other	(1.1)	(0.2)	(0.9)
Total net finance expense	(3.0)	(3.6)	0.6

 

2. Tax.  A reported tax charge of £24.4m is shown for the year (FY 2021: £28.3m). The adjusted tax charge is £27.0m (FY 2021: £23.5m), which equates to an effective tax rate of 19.8% on adjusted profit before tax.

 

	FY 2022	FY 2021
	£m	£m
Profit before tax	85.3	126.2
Less: share of underlying1 net profit in joint ventures	(14.3)	(5.4)
Profit before tax excluding joint ventures	71.0	120.8
Statutory tax rate	19.00%	19.00%
Current tax charge at statutory rate	(13.5)	(23.0)
Tax on joint venture profits2	(2.6)	(0.7)
Non-deductible portion of exceptional items	(7.0)	-
Other non-deductible expenses	(2.1)	(0.3)
Effect of change in tax rate used to calculate deferred tax	-	(5.1)
Residential Property Developer Tax	(0.3)	-
Prior year adjustments	0.6	1.4
Other adjustments	0.5	(0.6)
Tax charge as reported	(24.4)	(28.3)
Tax on amortisation	(0.4)	(0.3)
Tax on exceptional items	(2.2)	-
Effect of change in tax rate used to calculate deferred tax	-	5.1
Adjusted tax charge	(27.0)	(23.5)
1 Underlying net profit of joint ventures excludes the exceptional building safety charge (£9.8m) related to joint ventures 2 Most of the Group's joint ventures are partnerships where profits are taxed within the Group rather than the joint venture

 

3. Net working capital. 'Net Working Capital' is defined as 'Inventories plus Trade & Other Receivables (including Contract Assets), less Trade & Other Payables (including Contract Liabilities)' adjusted as below.

 

	FY 2022	FY 2021	Change £m
	£m	£m
Inventories	333.9	288.5	+45.4
Trade & Other Receivables1	646.3	559.9	+86.4
Trade & Other Payables2	(1,070.1)	(1,002.0)	-68.1
Net working capital	(89.9)	(153.6)	+63.7

 

¹ Adjusted to exclude capitalised arrangement fees and accrued interest receivable of £1.3m (FY 2021: £1.0m)

² Adjusted to exclude accrued interest payable of £0.6m (FY 2021: £0.5m) and JV funding obligation of £4.0m (FY 2021: £nil)

 

4. Cash flow. The operating cash flow was an inflow of £48.0m (FY 2021: inflow of £117.6m). Free cash flow was an inflow of £27.7m (FY 2021: inflow of £87.6m).

 

	FY 2022	FY 2021
	£m	£m
Operating profit - adjusted	139.2	131.3
Depreciation	22.9	20.5
Share option expense	9.7	12.1
Movement in fair value of shared equity loans	(0.4)	1.9
Share of underlying1 net profit of joint ventures	(14.3)	(5.4)
Other operating items 2	(17.6)	31.1
Change in working capital 3	(64.5)	(52.7)
Net capital expenditure (including repayment of finance leases)	(28.4)	(21.8)
Dividends and interest received from joint ventures	1.4	0.6
Operating cash flow	48.0	117.6
Income taxes paid	(20.3)	(28.3)
Net interest paid (non-joint venture)	-	(1.7)
Free cash flow	27.7	87.6

 

¹ Underlying net profit of joint ventures excludes the exceptional building safety charge (£9.8m) related to joint ventures

² 'Other operating items' includes shared equity redemptions (£1.5m) and impairments of investments (£0.9m) less provision movements (£19.5m) and a gain on disposal of property, plant & equipment (£0.5m)

³ The cash flow due to change in working capital excludes non-cash movements relating to the unwinding of discounting on land creditors (£1.2m) and other non-cash creditor movements

 

5. Net cash.  Net cash at the year end was £354.6m as a result of a net cash outflow of £3.4m from 1 January 2022.

 

	£m
Net cash as at 1 January 2022	358.0
Free cash flow (as above)	27.7
Dividends	(43.5)
Other1	12.4
Net cash as at 31 December 2022	354.6

 

¹ 'Other' includes net loan receipts from interests in joint ventures (£16.3m), proceeds from the issue of new shares (£10.2m) and proceeds from the exercise of share options (£1.6m); less the purchase of shares in the Company by the employee benefit trust (£15.7m)

 

6. Capital employed by strategic activity. An analysis of the capital employed in the Construction activities shows an increase of £32.2m since the prior year, split as follows:

 

Capital employed1 in Construction	FY 2022 £m	FY 2021 £m	Change £m
Construction & Infrastructure	(260.5)	(269.4)	+8.9
Fit Out	(86.8)	(86.2)	-0.6
Property Services	61.8	37.9	+23.9
	(285.5)	(317.7)	+32.2

 

 

An analysis of adjusted capital employed² in the Regeneration activities shows an increase of £50.1m since the prior year, split as follows: 

 

Capital employed1,2 in Regeneration	FY 2022 £m	FY 2021 £m	Change £m
Partnership Housing	189.3	155.6	+33.7
Urban Regeneration	100.4	84.0	+16.4
	289.7	239.6	+50.1

 

¹ Total assets (excluding goodwill, intangibles, inter-company financing and cash) less total liabilities (excluding corporation tax, deferred tax, inter-company financing and overdrafts).

² Adjusted to exclude exceptional Building Safety provisions

 

7. Exceptional Building Safety charge. Included in the £48.9m total exceptional building safety charge is £9.8m that has been recognised in respect of the Group's share of constructive and legal obligations to remediate legacy building safety issues within JVs, and this has been recognised within the Group's share of net profit of joint ventures. The remaining £39.1m charge has been recognised in cost of sales.

	2022	2021
	£m	£m
Exceptional building safety provisions recognised	39.1	-
Exceptional building safety charges within joint ventures	9.8	-
Total exceptional building safety charge	48.9	-

 

8. Dividends.  The Board of Directors has proposed a final dividend of 68p per share, an increase of 10% on the prior year. This will be paid on 18 May 2023 to shareholders on the register at 28 April 2023. The ex-dividend date will be 27 April 2023.

 

9. Principal risks and uncertainties. The Board continues to take a proactive approach to recognising and mitigating risk with the aim of protecting and safeguarding the interests of the Group and its shareholders in the changing environment in which it operates.

 

Details of the principal risks facing the Group and mitigating actions will be included in the 2022 Annual Report which will be published on 23 March 2023.  These are considered to be relevant risks and uncertainties for the Group at this time and are summarised below (in no order of magnitude):

 

Economic change and uncertainty - Despite economic headwinds, UK construction continues to benefit from sustained government investment commitments, as confirmed in the Autumn Statement. This continues to support the Group's market sectors which remain structurally secure particularly in regeneration, construction and infrastructure (primary areas in the UK targeted for growth). In addition, the Group's diversity of offering and strong balance sheet protects the business from cyclical changes in individual markets.

 

Exposure to UK housing market - The Group's long-term public sector partnerships models, Government support and UKs housing need complement our product position. However, headwinds such as interest rate rises and inflation, mortgage availability and loan-to-value ratios, have impacted consumer confidence, which together with continued planning constraints has resulting in a slowdown of sales. In Regeneration, cost inflation on some schemes is impacting their potential viability.

 

Poor contract selection and/or bidding - The quality of the Group's public and regulated industry sectors should safeguard future performance, allowing the Group to continue selecting the right projects. However, in some situations, inflation continues to stretch customer budgets resulting in preconstruction periods sometimes taking longer. Within the Group's bids, appropriate contingency levels are maintained and there also remains the potential to pass through inflationary costs as arrangements allow.

 

Poor project delivery (including changes to contracts and contract disputes) - Inflationary pressures continue to be a challenge but largely mitigated via a combination of the Group's ability to pass through inflation costs in bids and the application of contingency allowances and contract terms allowing inflation recovery on live projects. The Group's longstanding relationships and focus on customer experience should mitigate any significant issues and disputes should they arise.

 

Health and safety - Failure to protect the health, safety and wellbeing of its key stakeholders could damage the Group's reputation as a responsible employer and affect its ability to secure future work.  

 

Failure to attract and retain talented people - Talented people are needed to provide excellence in project delivery and customer service.  Skills shortages in the construction industry remain an issue for the foreseeable future.

 

Insolvency of key client, subcontractor, joint venture partner or supplier - Some partners are likely to be trading with stretched finances following the pandemic, unwind of government measures to support business recovery, and the reverse charge VAT initiative. More recent inflation and interest rate

increases will have place further pressure on balance sheets, leading to a greater likelihood of failure.

 

Mismanagement of working capital and investments - Poor management of working capital and investments leads to insufficient liquidity and funding problems.

 

Climate change - Failure to protect the environment in which we work by reducing carbon emissions and waste and to fully consider potential environmental risks on projects could cause delays to projects and damage the Group's reputation.

 

UK cyber activity and failure to invest in information technology - Cybercrime continues its prevalence and to counter this the Group's investment in IT continues to increase in order to meet the future needs of the business in terms of expected growth, security, and innovation, and enables its long-term success.  It is also essential to avoid reputational and operational impacts and loss of data that could result in significant fines and/or prosecution.

 

Cautionary forward-looking statement

 

These results contain forward-looking statements based on current expectations and assumptions. Various known and unknown risks, uncertainties and other factors may cause actual results to differ from any future results or developments expressed or implied from the forward-looking statements. Each forward-looking statement speaks only as of the date of this document. The Group accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

 

 

Consolidated income statement

For the year ended 31 December 2022

 

		2022	2021
	Notes	£m	£m
Revenue		3,612.2	3,212.8
Cost of sales		(3,241.3)	(2,830.0)
Gross profit		370.9	382.8
Analysed as:
Adjusted Gross profit		410.0	382.8
Exceptional building safety charge	3	(39.1)	-
Administrative expenses		(287.6)	(259.8)
Share of net profit of joint ventures		4.5	5.4
Other operating income		0.5	1.4
Operating profit		88.3	129.8
Analysed as:
Adjusted Operating profit		139.2	131.3
Exceptional building safety charge	3	(48.9)	-
Amortisation of intangible assets		(2.0)	(1.5)
Finance income		2.3	0.6
Finance expense		(5.3)	(4.2)
Profit before tax		85.3	126.2
Analysed as:
Adjusted Profit before tax		136.2	127.7
Exceptional building safety charge	3	(48.9)	-
Amortisation of intangible assets		(2.0)	(1.5)
Tax	4	(24.4)	(28.3)
Profit for the year		60.9	97.9
Attributable to:
Owners of the Company		60.9	97.9
Earnings per share
Basic	6	132.7p	212.4p
Diluted	6	130.4p	204.4p

 

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

The Consolidated income statement has been re-presented this year to give additional analysis of adjusted measures and the exceptional building safety charge.

 

Consolidated statement of comprehensive income

For the year ended 31 December 2022

 

	2022	2021
	£m	£m
Profit for the year	60.9	97.9
Items that may be reclassified subsequently to profit or loss:
Foreign exchange movement on translation of overseas operations	2.1	(0.2)
	2.1	(0.2)
Other comprehensive income/(expense)	2.1	(0.2)
Total comprehensive income	63.0	97.7
Attributable to:
Owners of the Company	63.0	97.7

 

 

Consolidated statement of financial position

At 31 December 2022

 

		2022	2021
	Notes	£m	£m
Assets
Goodwill and other intangible assets		221.2	221.9
Property, plant and equipment		74.8	66.6
Investment property		0.8	0.8
Investments in joint ventures	7	84.0	94.1
Non-current assets		380.8	383.4
Inventories		333.9	288.5
Contract assets		294.6	232.6
Trade and other receivables	8	353.0	328.3
Current tax assets		-	4.7
Shared equity loan receivables		0.4	1.5
Cash and cash equivalents	11	431.7	468.6
Current assets		1,413.6	1,324.2
Total assets		1,794.4	1,707.6
Liabilities
Contract liabilities		(74.2)	(78.5)
Trade and other payables	9	(963.2)	(891.4)
Current tax liabilities		(5.6)	-
Lease liabilities		(16.0)	(13.4)
Borrowings	11	(77.1)	(110.2)
Provisions	10	(55.1)	(33.4)
Current liabilities		(1,191.2)	(1,126.9)
Net current assets		222.4	197.3
Trade and other payables	9	(37.3)	(32.6)
Lease liabilities		(40.9)	(39.4)
Borrowings	11	-	(0.4)
Retirement benefit obligation		(0.2)	(0.2)
Deferred tax liabilities		(6.8)	(10.0)
Provisions	10	(21.8)	(23.9)
Non-current liabilities		(107.0)	(106.5)
Total liabilities		(1,298.2)	(1,233.4)
Net assets		496.2	474.2
Equity
Share capital		2.4	2.3
Share premium account		55.9	45.8
Other reserves		1.1	(1.0)
Retained earnings		436.8	427.1
Equity attributable to owners of the Company		496.2	474.2
Total equity		496.2	474.2

 

 

Consolidated cash flow statement

For the year ended 31 December 2022

 

		2022	2021
	Notes	£m	£m
Operating activities
Operating profit		88.3	129.8
Adjusted for:
Exceptional building safety items	3	48.9	-
Amortisation of intangible assets		2.0	1.5
Underlying share of net profit of equity accounted joint ventures		(14.3)	(5.4)
Depreciation		22.9	20.5
Share-based payments		9.7	12.1
Gain on disposal of property, plant and equipment		(0.5)	(0.5)
Movement in fair value of shared equity loan receivables		(0.4)	1.9
Impairment of investments		0.9	1.2
Proceeds on disposal of investment properties		-	1.9
Repayment of shared equity loan receivables		1.5	2.1
(Decrease)/increase in provisions (excluding exceptional building safety items)	10	(19.5)	26.4
Operating cash inflow before movements in working capital		139.5	191.5
(Increase)/decrease in inventories		(45.4)	5.7
Increase in contract assets		(62.0)	(60.8)
Increase in receivables		(24.4)	(94.0)
(Decrease)/increase in contract liabilities		(4.3)	22.9
Increase in payables		71.6	73.5
Movements in working capital		(64.5)	(52.7)
Cash inflow from operations		75.0	138.8
Income taxes paid		(20.3)	(28.3)
Net cash inflow from operating activities		54.7	110.5
Investing activities
Interest received		1.8	0.6
Dividends from joint ventures		1.4	-
Proceeds on disposal of property, plant and equipment		0.6	1.4
Purchases of property, plant and equipment		(10.5)	(6.7)
Purchases of intangible fixed assets		(1.3)	(1.3)
Net decrease in loans to joint ventures		16.3	1.5
Net cash inflow/(outflow) from investing activities		8.3	(4.5)
Financing activities
Interest paid		(1.8)	(1.7)
Dividends paid	5	(43.5)	(32.3)
Repayments of lease liabilities		(17.2)	(15.2)
Repayment of borrowings		(0.4)	-
Proceeds on issue of share capital		10.2	0.3
Payments by the Trust to acquire shares in the Company		(15.7)	(33.6)
Proceeds on exercise of share options		1.6	1.7
Net cash outflow from financing activities		(66.8)	(80.8)
Net (decrease)/increase in cash and cash equivalents		(3.8)	25.2
Cash and cash equivalents at the beginning of the year		358.4	333.2
Cash and cash equivalents at the end of the year	11	354.6	358.4
Cash and cash equivalents presented in the Consolidated cash flow statement include bank overdrafts. See note 11 for a reconciliation to Cash and cash equivalents presented in the Consolidated statement of financial position.

 

 

Consolidated statement of changes in equity

For the year ended 31 December 2022

 

	Share capital	Share premium account	Other reserves	Retained earnings	Total equity
	£m	£m	£m	£m	£m
1 January 2021	2.3	45.5	(0.8)	373.1	420.1
Profit for the year	-	-	-	97.9	97.9
Other comprehensive expense	-	-	(0.2)	-	(0.2)
Total comprehensive (expense)/income	-	-	(0.2)	97.9	97.7
Share-based payments	-	-	-	12.1	12.1
Tax relating to share-based payments	-	-	-	8.2	8.2
Issue of shares at a premium	-	0.3	-	-	0.3
Exercise of share options	-	-	-	1.7	1.7
Purchase of shares in the Company by the Trust	-	-	-	(33.6)	(33.6)
Dividends paid	-	-	-	(32.3)	(32.3)
1 January 2022	2.3	45.8	(1.0)	427.1	474.2
Profit for the year	-	-	-	60.9	60.9
Other comprehensive income	-	-	2.1	-	2.1
Total comprehensive income	-	-	2.1	60.9	63.0
Share-based payments	-	-	-	9.7	9.7
Tax relating to share-based payments	-	-	-	(3.3)	(3.3)
Issue of shares at a premium	0.1	10.1	-	-	10.2
Purchase of shares in the Company by the Trust	-	-	-	(15.7)	(15.7)
Exercise of share options	-	-	-	1.6	1.6
Dividends paid	-	-	-	(43.5)	(43.5)
31 December 2022	2.4	55.9	1.1	436.8	496.2

 

Other reserves

Other reserves include:

 

·      Capital redemption reserve of £0.6m (2021: £0.6m) which was created on the redemption of preference shares in 2003.

·      Hedging reserve of (£0.8m) (2021: (£0.8m)) arising under cash flow hedge accounting.  Movements on the effective portion of hedges are recognised through the hedging reserve, while any ineffectiveness is taken to the income statement. 

·      Translation reserve of £1.3m (2021: (£0.8m)) arising on the translation of overseas operations into the Group's functional currency.

 

Retained earnings

Retained earnings include shares in Morgan Sindall Group plc purchased in the market and held by the Morgan Sindall Employee Benefit Trust ('the Trust') to satisfy options under the Company's share incentive schemes. The number of shares held by the Trust at 31 December 2022 was 1,135,131 (2021: 1,051,664) with a cost of £26.1m (2021: £25.3m). All of the shares held by the Trust were unallocated at the year end and dividends on these shares have been waived. Based on the Company's share price at 31 December 2022 of £15.30 (2021: £25.20), the market value of the shares was £17.4m (2021: £26.5m).

 

 

Notes to the consolidated financial statements

For the year ended 31 December 2022

 

1 Basis of preparation

 

General information

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2022 or 2021 but is derived from those accounts.  A copy of the statutory accounts for 2021 was delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's annual general meeting.  The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) of the 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 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. Actual future results may differ materially from those expressed in or implied by these statements.

 

While the financial information included in this preliminary announcement was prepared in accordance with the recognition and measurement criteria of UK adopted International Accounting Standards ('UK IAS'), this announcement does not itself contain sufficient information to comply with UK IAS.

 

The consolidated financial statements will be available in March 2023. A copy will be delivered to the Registrar of Companies following the Company's annual general meeting.

 

Further information on the Group, including the slide presentation document which will be presented at the Group's results meeting on 23 February 2023, can be found on the Group's corporate website

www.morgansindall.com.

 

             Going Concern

In determining the appropriate basis of preparation of the Financial Statements, the directors are required to consider whether the Group and Company can continue in operational existence during the going concern period, which the directors have defined as the date of approval of the 31 December 2022 financial statements through to 29 February 2024.

 

As at 31 December 2022, the Group held cash of £431.7m, including £38.0m which is the Group's share of cash held within jointly controlled operations, and total overdrafts repayable on demand of £77.1m (together net cash of £354.6m). Should further funding be required, the Group has significant committed financial resources available including unutilised bank facilities of £180m, of which £165m matures in October 2025 and £15m matures in March 2024.  The Group's secured order book at 31 December 2022 is £8.5bn (2021: £8.6bn), of which £3.2bn relates to the 12 months ended 31 December 2023.

 

The directors have reviewed the Group's forecasts and projections for the going concern period, including sensitivity analysis to assess the Group's resilience to the potential financial impact on the Group of any plausible losses of revenue or operating profit which could arise from one of the principal risks to the business occurring. The analysis also includes a reasonable worst-case scenario in which the Group's principal risks manifest in aggregate to a severe but plausible level involving the aggregation of the impacts of a number of these risks.  The modelling showed that the Group would remain profitable throughout the going concern period and there is considerable headroom above lending facilities such that there would be no expected requirement for the Group to utilise the bank facility, which underpins the going concern assumption on which these financial statements have been prepared. As part of the sensitivity analysis the directors also modelled a scenario that stress tests the Group's forecasts and projections, to determine the scenario in which the headroom above the committed bank facility would be exceeded. This model showed that the Group's operating profit would need to deteriorate substantially for the headroom to exceed the committed bank facility. The directors consider there is no plausible scenario where cash inflows would deteriorate this significantly. However, as part of their analysis the Board also considered further mitigating actions at their discretion, such as a reduction in investments in working capital, to improve the position identified by the reasonable worst-case scenario. In all scenarios, including the reasonable worst case, the Group is able to comply with its financial covenants, operate within its current facilities, and meet its liabilities as they fall due.

 

Accordingly, the directors consider there to be no material uncertainties that may cast significant doubt on the Group's ability to continue to operate as a going concern. They have formed a judgement that there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the going concern period. For this reason, they continue to adopt the going concern basis in the preparation of these Financial Statements. The period from the date of signing of these Financial Statements to 29 February 2024 has been assessed following consideration of the budgeting cycles and typical contract lengths undertaken across the Group.

            

Changes in 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 2021.

 

 

2 Business segments

 

For management purposes, the Group is organised into five operating divisions: Construction & Infrastructure, Fit Out, Property Services, Partnership Housing and Urban Regeneration, and this is the structure of segment information reviewed by the Chief Operating Decision Maker (CODM) and used to assess performance and allocate resources. The CODM is determined to be the Board of Directors and reporting provided to the Board is in line with these five divisions, which have been considered to be the group's operating segments. Additional information is included in the Divisional Review related to the Group's Construction and Infrastructure division where this is considered useful to the Group's stakeholders.

 

The five operating divisions' activities are as follows:

 

·      Construction & Infrastructure: Morgan Sindall Construction & Infrastructure Ltd focuses on the

education, healthcare, commercial, industrial, leisure and retail markets in Construction; and

highways, rail, energy, water and nuclear markets in Infrastructure. Infrastructure also includes the

BakerHicks design activities based out of the UK and Switzerland.

·      Fit Out: Overbury plc is focused on fit out and refurbishment in commercial, central and local

government offices, as well as further education; Morgan Lovell plc provides office interior design

and build services direct to occupiers.

·      Property Services: Morgan Sindall Property Services Limited provides response and planned

maintenance activities for social housing and the wider public sector.

·      Partnership Housing: Lovell Partnerships Limited is focused on working in partnerships with local

authorities and housing associations. Activities include mixed-tenure developments, building and

developing homes for open market sale and for social/affordable rent, design and build house

contracting and planned maintenance and refurbishment.

·      Urban Regeneration: Muse Places Limited is focused on transforming the urban landscape

through partnership working and the development of multi-phase sites and mixed-use

regeneration.

 

Group activities represents costs and income arising from corporate activities which cannot be

meaningfully allocated to the operating segments. These include the costs of the Group Board,

treasury management, corporate tax coordination, Group finance and internal audit, insurance

management, company secretarial services, Group general counsel services, information technology

services, interest revenue and interest expense.

 

 

The Group reports its segmental information as presented below:

 

Year ended 31 December 2022
	Construction & Infrastructure	Fit Out	Property Services	Partnership Housing	Urban Regeneration	Group Activities	Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
External revenue	1,545.4	967.5	163.5	691.8	244.0	-	-	3,612.2
Inter-segment revenue	23.2	-	-	4.4	-	-	(27.6)	-
Total revenue	1,568.6	967.5	163.5	696.2	244.0	-	(27.6)	3,612.2
Adjusted operating profit/(loss) (note 15)	52.1	52.2	4.3	37.4	18.9	(25.7)	-	139.2
Amortisation of intangible assets	-	-	(2.0)	-	-	-	-	(2.0)
Exceptional operating items	-	-	-	(5.5)	(43.4)	-	-	(48.9)
Operating profit/(loss)	52.1	52.2	2.3	31.9	(24.5)	(25.7)	-	88.3
Finance income								2.3
Finance expense								(5.3)
Profit before tax								85.3
Other information:
Depreciation	(13.8)	(3.1)	(1.5)	(2.7)	(0.9)	(0.9)		(22.9)
Average number of employees	4,091	962	949	1,002	93	106		7,203
Year ended 31 December 2021
	Construction & Infrastructure	Fit Out	Property Services	Partnership Housing	Urban Regeneration	Group Activities	Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
External revenue	1,509.0	795.3	133.8	572.2	202.5	-	-	3,212.8
Inter-segment revenue	10.6	0.1	-	-	-	-	(10.7)	-
Total revenue	1,519.6	795.4	133.8	572.2	202.5	-	(10.7)	3,212.8
Adjusted Operating profit/(loss) (note 15)	58.1	44.2	4.1	33.2	12.1	(20.4)	-	131.3
Amortisation of intangible assets	-	-	(1.5)	-	-	-	-	(1.5)
Operating profit/(loss)	58.1	44.2	2.6	33.2	12.1	(20.4)	-	129.8
Finance income								0.6
Finance expense								(4.2)
Profit before tax								126.2
Other information:
Depreciation	(12.3)	(3.0)	(1.0)	(2.4)	(0.8)	(1.0)		(20.5)
Average number of employees	3,966	839	786	884	88	103		6,666

 

Segment assets and liabilities are not presented as these are not reported to the CODM.

 

 

3 Exceptional building safety charge

		2022	2021
	Notes	£m	£m
Exceptional building safety provisions recognised	10	39.1	-
Exceptional building safety charges within joint ventures	7	9.8	-
Total exceptional building safety charge		48.9	-

During 2022 the Partnership Housing division signed the Developers Pledge (the "Pledge") with the Department of Levelling Up, Housing and Communities ("DLUHC") setting out the principles under which life critical fire-safety issues on buildings that they have developed of 11 meters and above are to be remediated. A letter was also received in July 2022 from DLUHC requesting information to assess whether it may be appropriate for Urban Regeneration to also commit to the principles of the Pledge as part of its commitment to support the remediation of historic cladding and fire safety defects over and above its obligations under the new Building Safety Act.

The final-form legal contract was issued in January 2023 and both Partnership Housing and Urban Regeneration have confirmed in writing to DLUHC their intention to sign and execute the contract on or before the stipulated date of 13 March 2023.  

A comprehensive review has been completed during the year to identify legal and constructive obligations related to the Pledge, including reimbursement of grants provided by the Building Safety Fund (the "BSF"). As a result of this review, and the obligations arising as a result of the Pledge, provisions were recognised totaling £48.9m and these have been presented as exceptional charges due to their materiality and irregular nature.

Included in the £48.9m total exceptional building safety charge is £9.8m that has been recognised in respect of the Group's share of constructive and legal obligations to remediate legacy building safety issues within JVs, and this has been recognised within the Group's share of net profit of joint ventures. The remaining £39.1m charge has been recognised in cost of sales.

4 Tax

 

Tax expense for the year
		2022	2021
		£m	£m
Current tax:
Current year		25.0	22.9
Adjustment in respect of prior years		8.5	(0.3)
		33.5	22.6
Deferred tax:
Current year		-	1.7
Effect of change in tax rate used to calculate deferred tax balances		-	5.1
Adjustment in respect of prior years		(9.1)	(1.1)
		(9.1)	5.7
Tax expense for the year		24.4	28.3

 

Corporation tax is calculated at 19.00% (2021: 19.00%) of the estimated taxable profit for the year.

 

The table below reconciles the tax charge for the year to tax at the UK statutory rate:

 

	Notes	2022	2021
		£m	£m
Profit before tax		85.3	126.2
Less: underlying post tax share of profits from joint ventures	7	(14.3)	(5.4)
		71.0	120.8
UK corporation tax rate		19.00%	19.00%
Income tax expense at UK corporation tax rate		13.5	23.0
Tax effect of:
Adjustments in respect of prior years:
Change to tax base cost of goodwill		(1.1)	-
Other		0.5	(1.4)
Expenses for which no tax relief is recognised:
Proportion of exceptional items		7.0	-
Proportion of share-based payments		1.6	-
Other non-deductible expenses		0.5	0.3
Tax liability upon joint venture profits1		2.6	0.7
Residential property developer tax		0.3	-
Change in tax rate used to calculate deferred tax balances		-	5.1
Other		(0.5)	0.6
Tax expense for the year		24.4	28.3

¹ Certain of the Group's joint ventures are partnerships for which profits are taxed within the Group rather than within the joint venture.

 

 

5 Dividends

 

Amounts recognised as distributions to equity holders in the year:
	2022	2021
	£m	£m
Final dividend for the year ended 31 December 2021 of 62.0p per share	28.3	-
Final dividend for the year ended 31 December 2020 of 40.0p per share	-	18.5
Interim dividend for the year ended 31 December 2022 of 33.0p per share	15.2	-
Interim dividend for the year ended 31 December 2021 of 30.0p per share	-	13.8
	43.5	32.3

 

The proposed final dividend for the year ended 31 December 2022 of 68.0p per share is subject to approval by shareholders at the AGM and has not been included as a liability in these financial statements.

 

 

6 Earnings per share

 

		2022	2021
		£m	£m
Profit attributable to the owners of the Company		60.9	97.9
Adjustments:
Exceptional operating items net of tax		46.7	-
Amortisation of intangible assets net of tax		1.6	1.2
Deferred tax charge arising due to change in UK corporation tax     rates		-	5.1
Adjusted earnings		109.2	104.2
		2022 Number of shares (millions)	2021 Number of shares (millions)
Basic weighted average number of ordinary shares		45.9	46.1
Dilutive effect of share options and conditional shares not vested		0.8	1.8
Diluted weighted average number of ordinary shares		46.7	47.9
Basic earnings per share		132.7p	212.4p
Diluted earnings per share		130.4p	204.4p
Adjusted earnings per share		237.9p	226.0p
Diluted adjusted earnings per share		233.8p	217.5p

 

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. The average share price for the year was £19.12 (2021: £21.39).

 

A total of 681,571 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 2022 (2021: 865,271).

 

7 Investments in joint ventures

 

Investments in equity accounted joint ventures are as follows:

 

		2022	2021
	Notes	£m	£m
1 January		94.1	91.4
Equity accounted share of net profits:
Underlying share of net profits		14.3	5.4
Exceptional building safety charge	3	(9.8)	-
		4.5	5.4
Loans advanced to joint ventures		18.3	28.1
Loans repaid by joint ventures		(34.6)	(29.6)
Non-cash impairment		(0.9)	(1.2)
Dividends received		(1.4)	-
Reclassification to funding obligations payable	9	4.0	-
31 December		84.0	94.1

 

During 2022, an exceptional building safety charge of £9.8m has been recognised in respect of the Group's share of constructive and legal obligations to remediate legacy building safety issues within joint ventures. These obligations create potential funding obligations within joint ventures of £4.0m where the obligations recognised are in excess of the carrying values of investments. These funding obligations have been presented in amounts owed to joint ventures in note 9.

 

8 Trade and other receivables

 

		2022	2021
		£m	£m
Amounts falling due within one year
Trade receivables		243.6	200.3
Amounts owed by joint ventures		9.2	13.5
Prepayments		13.0	13.2
Insurance receivables		4.8	30.4
Other receivables		36.0	21.0
		306.6	278.4
Amounts falling due after more than one year
Trade receivables		46.4	49.9
		46.4	49.9
Trade and other receivables		353.0	328.3

 

The Group holds third party insurances that may mitigate the contract and legal liabilities described in note 10 - Provisions and note 13 - Contingent liabilities. Insurance receivables are recognised when reimbursement from insurers is virtually certain.

 

9 Trade and other payables

 

		2022	2021
		£m	£m
Trade payables		165.4	157.6
Amounts owed to joint ventures		4.2	0.2
Other tax and social security		107.0	107.5
Accrued expenses		637.7	602.7
Deferred income		5.8	8.9
Land creditors		30.8	8.9
Other payables		12.3	5.6
Current		963.2	891.4
Land creditors		30.9	32.6
Other payables		6.4	-
Non-current		37.3	32.6

 

 

10 Provisions

 

	Building Safety	Self-insurance	Contract & legal	Other	Total
		£m	£m	£m	£m
1 January 2021	-	22.8	-	8.1	30.9
Utilised	-	(1.6)	-	(5.0)	(6.6)
Additions	-	4.5	22.7	0.2	27.4
Reclassifications	-	-	10.7	-	10.7
Released	-	(4.5)	-	(0.6)	(5.1)
1 January 2022	-	21.2	33.4	2.7	57.3
Utilised	(0.8)	(1.0)	(6.5)	(0.2)	(8.5)
Additions	39.1	4.0	13.2	1.3	57.6
Released	-	(4.4)	(24.4)	(0.7)	(29.5)
31 December 2022	38.3	19.8	15.7	3.1	76.9
Current	38.3	-	15.7	1.1	55.1
Non-current	-	19.8	-	2.0	21.8
31 December 2022	38.3	19.8	15.7	3.1	76.9

 

Building Safety provisions

 

During 2022 the Partnership Housing division signed the Developers Pledge (the "Pledge") with the Department of Levelling Up, Housing and Communities ("DLUHC") setting out the principles under which life critical fire-safety issues on buildings that they have developed of 11 meters and above are to be remediated. A letter was also received from DLUHC requesting information to assess whether it may be appropriate for Urban Regeneration to also commit to the principles of the Pledge as part of its commitment to support the remediation of historic cladding and fire safety defects over and above its obligations under the new Building Safety Act.

 

The final-form legal contract was issued in January 2023 and both Partnership Housing and Urban Regeneration have confirmed in writing to DLUHC their intention to sign and execute the contract on or before the stipulated date of 13 March 2023.  

 

Management have reviewed legal and constructive obligations with regard to remedial work to rectify legacy building safety issues. Where obligations exist, these have been evaluated for the likely cost to address, including repayments of the Building Safety Fund. As a result of this review provisions were recognised, excluding those recognised in joint ventures, totalling £39.1m, of which £0.8m has been utilised during the period.

 

Self-insurance provisions

Self-insurance provisions comprise the Group's self-insurance of certain risks and include £11.1m (2021: £10.8m) held in the Group's captive insurance company, Newman Insurance Company Limited (the ''Captive'').

 

The Group makes provisions in respect of specific types of claims incurred but not reported (IBNR). The valuation of IBNR considers past claims experience and the risk profile of the Group. These are reviewed periodically and are intended to provide a best estimate of the most likely or expected outcome.

 

Contract and legal provisions

Contract and legal provisions include liabilities, loss provisions, defect and warranty provisions on contracts that have reached completion.

 

The Group also holds third party insurances that may mitigate the liabilities. Third party insurance reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. See note 8 for details of mitigating insurance receivables recognised at the period end.

 

Other provisions

Other provisions include property dilapidations and other personnel related provisions.

 

The majority of the provisions are expected to be utilised within 10 years.

 

11 Net cash

 

Net cash is defined as cash and cash equivalents less borrowings and non-recourse project financing as shown below:

 

		2022	2021
		£m	£m
Cash and cash equivalents		431.7	468.6
Bank overdrafts presented as borrowings due within one year		(77.1)	(110.2)
Cash and cash equivalents reported in the Consolidated cash flow statement		354.6	358.4
Borrowings due between two and five years		-	(0.4)
Net cash		354.6	358.0

 

Included within cash and cash equivalents is £38.0m (2021: £55.7m) which is the Group's share of cash held within jointly controlled operations.  There is £11.1m included within cash and cash equivalents that is held for future payment to designated suppliers (2021: £6.4m).

 

The Group has £180m of committed loan facilities maturing more than one year from the balance sheet date, of which £15m matures in March 2024 and £165m in October 2025. These facilities are undrawn at 31 December 2022.

 

12 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.  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, amounting to £105.0m (2021: £124.0m). At 31 December 2022, amounts owed to the Group by joint ventures was £9.2m (2021: £13.5m) and amounts owed by the Group to joint ventures was £4.2m (2021: £0.2m) including joint venture funding obligations.

 

Remuneration of key management personnel

The Group considers key management personnel to be the members of the group management team, and sets out below in aggregate, remuneration for each of the categories specified in IAS 24 'Related Party Disclosures'.

 

		2022	2021
		£m	£m
Short-term employee benefits		9.8	10.3
Post-employment benefits		0.1	0.1
Share-based payments		4.4	4.9
		14.3	15.3

 

Directors' transactions

There have been no related party transactions with any director in the year or in the subsequent period to 23 February 2023.

 

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 23 February 2023.

 

 

13 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 2022, contract bonds in issue under uncommitted facilities covered £148.3m of contract commitments of the Group, of which £25.7m related to joint arrangements and £0.1m relates to joint ventures (2021: £137.2m, of which £25.6m related to joint arrangements and £0.6m related to joint ventures).

 

Contingent liabilities may also arise in respect of subcontractor and other third party claims made against the Group, in the normal course of trading. These claims can include those relating to cladding/legacy fire safety matters, and defects.  A provision for such claims is only recognised to the extent that the directors believe that the Group has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefit will be required to settle the obligation. However, such claims are predominantly covered by the Group's insurance arrangements. Recoveries under insurance arrangements are recognised as insurance receivables when they are considered virtually certain.

 

 

Building Safety

 

At 31 December 2022, the Group held provisions totalling £48.1m, including those related to joint ventures, in respect of liabilities arising from commitments made under the Pledge. This represents managements best estimate of the cost and timing of remedial works required and repayments to the Building Safety Fund.

 

The ongoing legislative and regulatory changes in respect of legacy building safety issues create uncertainty around the extent of remediation required for legacy buildings, the liability for such remediation, recoveries from other parties and the time to be considered. It is possible that as remediation work proceeds, additional remedial works are required that may not have been identified from the reviews and physical inspections undertaken to date. The scope of buildings and remediation works to be considered may also change as legislation and regulations continue to evolve.

 

Uncertainties also exist in respect of the timing and extent of expected recoveries from other third parties involved in developments for which no assets have been recognised at 31 December 2022.

 

 

14 Subsequent events

 

There were no subsequent events that affected the financial statements of the Group.

 

 

15 Adjusted Performance Measures

In addition to monitoring and reviewing the financial performance of the operating segments and the Group on a statutory basis, management also use adjusted performance measures which are also disclosed in the Annual Report. These measures are not an alternative or substitute to statutory IFRS measures but are seen by management as useful in assessing the performance of the business on a comparable basis.  These financial measures are also aligned to the measures used internally to assess business performance in the Group's budgeting process and when determining compensation. The Group also uses other non-statutory measures which cannot be derived directly from the financial statements. There are four alternative performance measures used by management and disclosure in the Annual Report which are:

 

 

'Adjusted'                                         In all cases the term 'adjusted' excludes the impact of intangible amortisation and exceptional items.  This is used to improve the comparability of information between reporting periods to aid the use of the Annual Report in understanding the activities across the Group's portfolio.

 

                                                                Below is a reconciliation between the reported Gross profit, Operating profit and Profit before tax measures on a statutory basis and the adjustment made to calculate Adjusted Gross profit, Adjusted Operating profit and Adjusted Profit before tax.

 

                                                                Adjusted basic earnings per share and adjusted diluted earnings per share is the statutory measure excluding the post-tax impact of intangible amortisation and exceptional items, and the deferred tax charge arising due to changes in UK corporation tax rates. See note 6 for a detailed reconciliation of the adjusted EPS measures.

 

		Gross profit		Operating profit		Profit before tax
		2022	2021	2022	2021	2022	2021
		£m	£m	£m	£m	£m	£m
Reported		370.9	382.8	88.3	129.8	85.3	126.2
Add back: exceptional building safety charge1		39.1	-	48.9	-	48.9	-
Add back: amortisation of intangible assets		-	-	2.0	1.5	2.0	1.5
Adjusted		410.0	382.8	139.2	131.3	136.2	127.7
1 The exceptional building safety charge includes items recognised in Cost of sales (£39.1m) and Share of net profit of joint ventures (£9.8m) (See note 3).

 

'Net cash'                                           Net cash is defined as cash and cash equivalents less borrowings and non-recourse project financing. Lease liabilities are not deducted from net cash. A reconciliation of this number at the reporting date can be found in note 11. In addition, management monitor and review average daily net cash as good discipline in managing capital. Average daily net cash is defined as the average of the 365 end of day balances of the net cash over the course of a reporting period.

 

'Operating cash flow'                       Management use an adjusted measure for operating cash flow as it encompasses other cashflows that are key to the ongoing operations of the Group such as repayments of lease liabilities, investment in property, plant and equipment, investment in intangible assets, and returns from equity accounted joint ventures. Operating cash flow can be derived from the cash inflow from operations reported in the consolidated cash flow statement as shown below.

 

                                                                Operating cash flow conversion is operating cash flow divided by adjusted operating profit as defined above.

 

 

		2022	2021
		£m	£m
Cash inflow from operations - Reported		75.0	138.8
Interest received from joint ventures		-	0.6
Dividends from joint ventures		1.4	-
Proceeds on disposal of property, plant and equipment		0.6	1.4
Purchases of property, plant and equipment		(10.5)	(6.7)
Purchases of intangible fixed assets		(1.3)	(1.3)
Repayments of lease liabilities		(17.2)	(15.2)
Operating cash flow		48.0	117.6

 

'Return on capital employed'          Management use return on capital employed (ROCE) in assessing the performance and efficient use of capital within the Regeneration activities.  ROCE is calculated as adjusted operating profit plus interest received from joint ventures divided by adjusted average capital employed. Adjusted average capital employed is the 12-month average of total assets (excluding goodwill, other intangible assets and cash) less total liabilities (excluding corporation tax, deferred tax, intercompany financing, overdrafts and exceptional building safety items).  

 

 

We confirm to the best of our knowledge:

 

1.     The financial statements, prepared in accordance with the applicable set of accounting standards, 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;

 

2.     The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

 

3.     The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

 

 

The contents of this announcement, including the responsibility statement above, have been extracted from the annual report and accounts for the year ended 31 December 2022 which will be available on publication at http://www.morgansindall.com. Accordingly, this responsibility statement makes reference to the financial statements of the Company and the Group and to the relevant narrative appearing in that annual report and accounts rather than the contents of this announcement.

 

This responsibility statement was approved by the Board on 23 February 2023 and is signed on its behalf by:

 

 

 

 

 

 

John Morgan                           Steve Crummett

Chief Executive                       Finance Director