The recent fire which destroyed a new £16m chemistry building at the University of Nottingham and problems with London construction contracts have led to a profit warning from builder Morgan Sindall.
Its shares have dropped 104.5p or 13% to 684p after it said full year results would be below the level it expected in August. It blamed a small number of fixed price construction contracts which were due to complete within the next six months. It said:
Delivery pressures in London and the south’s construction activities have adversely impacted performance with programme slippage and increases in costs to complete projects both contributing factors.
Additional resources have been required to complete these contracts which, when added to inflationary pressures since contract win, have increased forecast costs to complete. Also, where programme overruns are now anticipated, forecast contractual penalties have further increased the potential contract costs.
Chief executive John Morgan said:
We are obviously disappointed that a small number of construction contracts in London and the south have been impacted by timetable slippage and increased estimated costs to complete.
This is a short term and localised issue which is receiving the highest level of management attention and which should be worked through over the next six months.
On top of that, the destruction of the GlaxoSmithKline carbon neutral laboratory of sustainable chemistry at Nottingham also had an impact. The company said:
Work commenced on site in autumn 2013 and was due for completion in early 2015, and therefore the loss of expected contribution from the time of the fire up to completition has further impacted divisional performance. Numis said:
The impact of overruns on several fixed price contracts is some £8m on Numis estimates and we factor this into our estimates for the current year. We believe these losses are discrete to these projects in the London market and would also point to other divisions continuing to show good progress as lead indicators and orders improve. Hence while the shares will inevitably be impacted by this news, the valuation remains attractive and Morgan Sindall is one of the best placed companies given our view that commercial and affordable housing markets will be key aspects of construction activity improvement from 2015 onwards.
Liberum analysts reduced their price target from 800p to 720p, saying:
We cut our earnings per share estimates by 21% for 2014, by 15% for 2015 and 10% for 2016. The warning relates to London construction (a relatively small division that was formed less than five years ago) with both project delays and cost inflation. There is only modest mitigation from Fit Out and lower central costs. We expect the shares to fall significantly today. We cut our price target by 10%, less than the downgrade, as the eventual recovery potential is undiminished. However, we expect the market to focus on the risks.
Jefferies said Kier, up 5p to £15.34, could face similar headwinds since it has significant operations in the south east.
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