Now and then, a sneaky FTSE 250 stock comes out of nowhere and catches me by surprise.
That’s what happened this week with construction and regeneration group Morgan Sindall (LSE: MGNS). Shares in the £1.82bn company managed to climb 77% this year before I noticed!
But a sudden 22% jump last week gave it away and I had to see what all the fuss was about.
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Jack of all trades
Morgan Sindall operates through six main divisions across the UK: construction, infrastructure, fit-out, property services, partnership housing, and urban regeneration services.
It does everything from large-scale civil engineering projects to commercial and retail maintenance and small urban transformations. This type of business is likely to be in high demand, which is a key factor I look for when considering an investment opportunity.
Why the sudden growth?
Last week’s price growth was big but the current trajectory started two years ago. After falling below £14 in late October 2022, the price began a recovery that’s barely faltered since, climbing 175%.
It’s hard to say what initiated the growth back then but last week’s reasons are clear. On Tuesday 22 October, it announced that full-year profits would now be “significantly ahead” of previous expectations. This was attributed to “exceptional volumes” in its fit-out division.
This adds to the already strong H1 results posted in August. Group revenue increased 14% to £2.2bn and operating profit before tax was up 17% to £70.1m.
That fit-out division performed particularly well, with revenue up 26% to £630m and operating profit up 36% to £41.3m.
Construction saw a 10% growth in revenue while infrastructure revenue rose 24%. Despite challenges such as inflation, both segments achieved strong operating margins within target ranges.
However, the Property Services division encountered difficulties, reporting an operating loss of £11m, due to cost inflation and restructuring efforts. This is a key risk for the firm as costly borrowing reduces the overall demand for commercial and residential construction.
The industry’s also highly competitive, with several large players vying for major contracts. Intense competition can lead to thinner profit margins as companies underbid to win projects, which could threaten Morgan Sindall’s profits.
Valuation
Despite the recent growth spurt, the forward price-to-earnings (P/E) ratio’s only 14.3, which I expected to be higher. The dividend yield currently sits at 3%, slightly below average for the FTSE 250. Still, it adds some value to the stock.
While the price could still climb a little further, the rapid growth’s likely to slow from here. Its long-term prospects still look good but I think I missed out on the biggest gains.
So how can I avoid missing an opportunity like this in the future? Strong results are one thing but they don’t guarantee future growth. It’s also important to look for shares in growing industries with high demand. Second, the company’s order book and project pipeline give an idea of upcoming revenue.
If it’s been increasing its dividends, that’s another good sign. By examining sector demand, financial indicators and macro trends, investors can improve their chances of anticipating a stock’s upward movement before it happens.
