Morgan Sindall plc - Interim Results for the six months ended 30 June 2005 on Monday, 8  August 2005
A typical affordable housing site

Buy: Morgan Sindall (MGNS)

Morgan Sindall is firing on most cylinders, and chief executive John Morgan reckons there are more improvements on the way. With a solid pipeline of work and at 14 times forecast earnings, the shares still offer good value, writes Jonas Crosland.

Morgan Sindall’s half-year results were pretty much in line with the upbeat July trading statement, with adjusted operating profit up 37 per cent to £24.9m and strong cash generation.

The outstanding performance came from fit out, but all key divisions showed decent growth. Adjusted operating profit at fit out was up 27 per cent at £14.6m, while operating margins moved up from 3.9 per cent to 4.3 per cent. Around two-thirds of revenue related to the fit out of existing office space, with London accounting for two-thirds of all revenue. Crucially, the forward order book rose to a record £568m, up 22 per cent from the December 2016 year-end.

The largest division covers construction and infrastructure, and operating profit jumped from £3.2m to £7.6m. Mr Morgan conceded that margins were not best in class at 1.1 per cent, but this was a big improvement from 0.5 per cent a year earlier, and well on the way to achieving a targeted 2 per cent in construction and 2.5 per cent in infrastructure.

In partnership housing, which includes mixed tenure housing, maintenance and refurbishment, profit rose by a fifth to £5.5m, and this division is expected to attract a lion’s share of the investment budget, as demand for affordable housing continues to grow.

Analysts at Peel Hunt are forecasting adjusted pre-tax profit for the year to December 2017 of £60m and earnings per share of 105.4p (from £45.3m and 84.7p in 2016).

Hold: London Stock Exchange (LSE)

Much of the mergers and acquisition premium remains in the shares, which might suggest that investors expect further offers; or is simply a reflection of strong underlying performance. At 27 times forward earnings, the shares are too expensive for new investors, writes Emma Powell.

The failure of its proposed merger with rival Deutsche Börse doesn’t seem to have taken the wind out of London Stock Exchange’s sails. During the first six months of the year, its indices and post-trade services continued to be the jewels in the crown.

Management has expanded the group’s reach geographically and via product lines. It acquired US-based data and analytics business Mergent, as well as The Yieldbook and Citi Index businesses from Citigroup, hoping to gain traction in fixed-income data and indexation. The FTSE Russell indices continued to prove popular, increasing revenue 16 per cent on an organic, constant currency basis. The amount of exchange-traded fund assets benchmarked by these indices was up more than a third to $530bn.

The clearing of over-the-counter derivatives continued to be strong. SwapClear saw client trades increase by a third, and members of the platform up from 102 to 106; while ForexClear saw members up from 23 to 27. Overall revenue at LCH, the post-trade services business, was up 17 per cent at constant currencies.

Primary capital markets revenue was up 5 per cent at fixed currencies thanks to a doubling of new money raised on the UK and Italian markets. However, this was offset by a reduction in trading of derivative contracts and equity traded on its secondary markets platform.

Analysts at Numis expect adjusted pre-tax profits of £754m during the 12 months to December 2017, giving earnings per share of 146p (2016: £623m, 122p).

Sell: Pearson (PSON)

The shares now trade on just 11 times forward earnings, significantly cheaper than peers. But red flags fly: finance costs were up by £20m in the first half due to a higher level of debt, the US education market remains unattractive and digital expansion is expected to cost around £725m a year, writes Megan Boxall.

For the first time in 2017, Pearson’s numbers offer a glimmer of hope. In North America — which contributes almost two-thirds of revenue — fewer stores are returning college textbooks. Savings from last year’s restructuring programme have helped to send adjusted operating profit to £107m in the reported period, from £15m in last year’s first half. And free cash outflows narrowed to £342m. But the first half contributes very little to Pearson’s overall performance, and on some of the more meaningful metrics there is less room for optimism.

Demand for print books and school assessment material remains poor, meaning North American revenue dropped 1 per cent to £1.3bn on a constant currency basis. And despite management’s insistence that digital revenues are improving, there is little evidence of this in the numbers. Riskier, deferred revenues rose 4 per cent.

The most impressive performance came from the group’s 47 per cent stake in Penguin Random House, where adjusted operating profit rose 28 per cent to £46m. But the sale of just under half of that stake is due to complete in September, which has forced management to lower its guidance for the year to December 2017. The mid-point of adjusted operating profit expectations is now £576m, 9 per cent down on the 2016 return, while broker Numis expects adjusted earnings per share to fall from 70.3p to 56.8p.

Chris Dillow: The global savings glut

One of the most important features of the world economy in the 21st century has finally become headline news — if only on the back pages — with the transfer of Neymar from Barcelona to Paris Saint-Germain for £200m, more than twice the previous world-record transfer fee.

As Arsène Wenger has said, this move can’t be justified in football terms: Neymar’s undoubted ability is unlikely to win PSG so many new supporters or so much prize money as to recoup his fee and wages.

Instead, his transfer is a story about the world economy. Qatar Sports Investments — the owner of PSG — is using Qatar’s massive gas revenues to promote the country’s image around the world. This is one manifestation of what former Fed chairman Ben Bernanke has called the global savings glut. Current account surpluses in the Middle East and Asia have for years been reinvested in western assets, thus bidding up their prices.

Of course, footballers are not the only asset involved here. There are two of more direct interest to western investors.

One is government bonds. Non-US investors now own over $6 trillion of US Treasury bonds. Their buying since the late 1990s has forced down bond yields not just in the US but in the UK and Europe, too.

The other is housing. A huge chunk of central London property is now owned by overseas investors. One reason for this is that it has been regarded as a safe haven, somewhere to flee to if or when the political climate changes in their home country. Christian Badarinza at the National University of Singapore and Tarun Ramadorai at Imperial College London have shown that London house prices rise when political or economic uncertainty increases overseas. This was why Nawaz Sharif, former prime minister of Pakistan, bought a house in London. And it’s one reason why prime London house prices have fallen since last year’s referendum to leave the EU: that vote signalled that the UK perhaps wasn’t so secure for foreigners.

These two developments have raised UK house prices generally. It’s not just that there been a ‘trickle down’ from London to the rest of the country. It’s also that falling bond yields have reduced mortgage rates and so raised house prices. From this perspective, you shouldn’t complain about Neymar’s transfer fee. It has been part of the same process that has added tens of thousands of pounds to the price of your house.

All this, though, raises a question. Why haven’t those current account surpluses been reinvested into more productive assets such as new companies or new capital equipment — either directly by foreign investors buying into new companies or private equity, or indirectly via falling bond yields stimulating more capital spending?

It’s because there’s a dark side to the global savings glut — a lack of desire in the west to invest in real productive companies. There are countless possible reasons for this: animal spirits have been depressed by the tech crash and financial crisis; companies fear that investments today will be made unprofitable by future technical progress; managers find it hard to persuade shareholders to back expansion plans; uncertainty; a lack of aggregate demand caused in part by fiscal austerity; cheap labour deterring capital-labour substitution; low profits; or perhaps just a lack of new innovative ideas.

Whatever the reason, the global savings glut has existed alongside weak capital spending.

This has important implications.

It’s a trivial accounting identity that every pound lent must be a pound borrowed. Foreigners have been net lenders, so somebody must be a borrower. That somebody has not been UK companies: since 2002 these have generated more cash than they’ve spent on new equipment. So who has it been?

Before 2008, it was homebuyers (in the US as well as UK), who took advantage of cheap and freely available mortgages. From this perspective, the financial crisis was due in part to the savings glut; it led to a ‘reach for yield’ whereby banks over-extended themselves into risky assets.

Since the crisis, however, the somebody has been the government. This is why rising government debt hasn’t led to rising gilt yields. The same global savings glut that has depressed yields has also increased government borrowing.

The mechanism whereby it does so, of course, is by depressing demand and hence taxes: current account surpluses are not being fully recycled into aggregate demand in the west. Emmanuel Farhi of Harvard University and Ricardo Caballero of MIT have shown how demand for safe assets can depress output when interest rates are low.

Economists had hoped that the fall in oil prices would reduce the savings glut. True, it has helped to cut the current account surpluses of oil and gas exporters. But Neymar’s transfer reminds us that they still have a huge stock of wealth to reinvest. And because they can’t do so in productive assets, there is, say Farhi and Caballero, “fertile ground for the emergence of bubbles”.

It would perhaps be too optimistic to think that such bubbles will be confined to footballers’ transfer fees.

Chris Dillow is an economics commentator for Investors Chronicle

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