Shares in construction and housebuilding firm Morgan Sindall Group (LSE: MGNS) have surged higher since October. Morgan Sindall’s share price has risen by 125% over the last 12 months and is up by more than 50% since January.
The company has upgraded its profit guidance three times in the last six months. Profits for the first half of 2021 were 46% above the same period in 2019, before the pandemic hit. But despite these bumper results, the shares are falling today. I’m wondering if this is a buying opportunity for my portfolio — or if this could be the top for this FTSE 250 stock.
A strong performance
Morgan Sindall says trading was “substantially ahead of pre-pandemic 2019 levels” during the first half of 2021. Strong demand for infrastructure and affordable housing made a big contribution to growth. The order book was steady at £8.3bn, unchanged from the end of 2020.
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This progress flowed through to profits. Adjusted pre-tax profit of £53.1m was 46% higher than during the same period in 2019. The business also continued to generate plenty of cash. Net cash at the end of June was £337m, up from £146m one year earlier.
Shareholders will get an interim dividend of 30p per share, which is an increase of 43%. That puts the stock on trade for a 3.2% yield this year.
Why I like MGNS
I normally steer clear of construction businesses, as they often have low profit margins and can run into trouble of projects overrun. But I am a fan of Morgan Sindall and have previously owned the shares (sadly, I sold them too soon).
Unlike some rivals, this company has steered clear of problems in recent years and delivered consistent growth. I think that one reason for this is that chief executive John Morgan is one of the founders of the business, and its second-largest shareholder.
Morgan’s 7.5% stake is worth around £85m at the current share price. I estimate that his dividend income this year could be more than £2.5m. Unlike hired managers on big salaries, Morgan’s own interests are closely aligned with those of his shareholders. That’s something I like.
Needless to say, I also think that Morgan Sindall is a very well-run business, with great financial discipline.
Morgan Sindall share price: what I’m going to do
Despite today’s strong results, the stock is down by about 4% at the time of writing.
In my view, this could be a signal that the market does not expect Morgan Sindall’s rapid growth to continue. Indeed, broker forecasts for 2022 and 2023 suggest profits will be broadly flat over this period.
That’s not a bad result, of course. But construction is cyclical, especially housing. After such a strong run, I feel that a more cautious view makes sense. Profits might be about to peak.
Although the shares still look cheap, on around 12 times forecast earnings, this ratio is based on record profits. If earnings fell to 2019 levels, Morgan Sindall would trade on a price-to-earnings of 15.
I may be completely wrong to worry. Morgan Sindall could keep growing for several more years. But I’m not comfortable investing in construction after such a strong run. I’m going to stay on the sidelines for now.
