DRAFT: ASS#1 Step 2 DECISION DISCUSSION ABOUT ANNUAL REPORTS

Morgan Sindall: One of UK's biggest Construction Companies
(please see previous posts for more about who Morgan Sindall are)
 

THE DECISION DISCUSSION POINTS

Decision making questions for me…

• ·       Are they making a profit?
• ·       Trends in profit
• ·       Share price
• ·       Investments

Something else that is more qualitative on a personal note if I was to invest would be:

• ·       How are they as a company?

• ·       Innovative, long duration?

• ·       What are their values and do they live by their values

REPORT PERFORMANCE OVERVIEW

Gross profit               GBP $181M       AU $379M       increased

Operating profit        GBP $26M        AU $54.5M      increased

Profit after tax           GBP $18M        AU $37.7M      increased

Total assets                GBP $1055M    AU $2210M     increased

Liabilities                    GBP $787M      AU $1649M     increased

Total Equity                GBP $267.9M   AU $559M        increased

Operating profit        GBP $26.5         AU $55M          increased

Net Cash Inflow         GBP $3.3M       AU $7M            decreaed

Investing Activities    GBP $(3.4)        AU ($7M)         outflow increased

Financing activities   GBP $(5.1)         AU ($10.5M)    outflow increased

Dividends paid           GBP $(11.5M)                             same

Cash and equiv’s        GBP $87.6M     AU $183.5M    decreased

KCQ: We are taking about MILLIONS of POUNDS and DOLLARS with this Company!! This is real life and this is a large successful company  given looking at the profit and Dividends paid.
  

SHARE PRICE

I was reviewing the website and came across this graph about share prices and I was able to extrapolate the dates from the commencement 1994 to current 2015 – so 20 years worth of data.

KCQ: I was impressed with the Company as it has developed and expanded for the past 20 years giving it longevity and a good market name.  This is also a good decision making point, however with consideration to the Annual Reports and what story they are telling regarding the financial status of the Company as a whole.

As an investor this would be my first point of call – how are they performing?

As you can visually see there is a big peak followed by a steep drop with a steady incline again.  Not related to the Annual Reports of 2012 – 2014 but related to the overall financial status of the Company and I think that it is an important factor to consider.  How has it recovered?

Q: What is the drop caused by?

A: In 2008 there was the GFC so this corresponds to this.  I haven’t looked at the 2008 and 2009 Financial Reports to read any further but I might do so a little later.  I think it would be interesting to see their explanations and notes as Company’s prefer to “sell” how good they are doing in business rather then saying how bad they have performed.  Manipulation of numbers can be done eg ABC Learning.  So I would like to see the discussion and the Directors report in these 2 years.

KCQ: Since the “crash” seen in 2008 there has been a steady trend increase in share price which is very positive.  I think looking at long term diagrams such as this is very good to be able to give an overall picture then to just look at a few years.  This is also true of any market listing as if you are in investments then you need to think long term rather then short term due to fluctuations in short term markets.  This graph provides a very good example of this.

This information is positive towards making a decision to invest in this company.

ANNUAL REPORTS

MY FIRST IMPRESSION:  

Clear concise and well presented – which I believe is good as it is firstly engaging.  Reading Annual Reports with no images and all text can be daunting.  So thinking that it ‘looks good’ may seem petty from a financial perspective BUT what would you prefer to read? 

Their Financial Year runs from 1 January to 31 December, which is different to our fiscal year here in Australia.

Very clear and understandable for a student so I was happy.  Also for an everyday person in investment they need to understand what is being presented.

KCQ: Oh now that’s the “understandability” concept!

LIGHT BULB MOMENT: Wow – it’s all there!! Everything we have gone through in the lectures is displayed in the Annual Report.  So now I can actually read and understand (mostly!) what Maria is discussing and what I am reading.  Yes, I know what the Principles are! I know about the Auditors Report and there it is in black and white.

I’m starting to feel all “accountant-like” now!

It was good to read the Director’s Report to see that he acknowledged the Construction Division was not achieving its targets, as well as proving an adequate explanation, in my opinion.  The director mentioned that it was due to current active projects being in their completion phase which were behind schedule due project slippage.  This in turn resulted in fewer contracts being able to be taken up.  Also inflation cost of materials for these long term projects as well as unforeseen resource requirements – it would be interesting to know more details about this for my own interested mind.  He did also mention that some of this was mitigated by the selling of unused property, but was mainly mitigated as a whole by other sections in the group doing exceptionally well.

KCQ: having multiple divisions in a company can be of benefit to assist the bottom line where one in underperforming and one may be over performing.  I guess the issue comes into play when the underperformance is by more than one discipline or when there is a global downturn that affects the company as a whole – as seen in 2008 with the GFC.  Something that I believe a company or any business, small or large, should take into consideration.

Q: Consolidated v Company?

In looking at the Annuals there are “consolidated” and “company” statements in the reports.  I wasn’t exactly sure of this firstly so I looked at the “Notes to the Consolidated Financial Statements” and did a little bit of research.

A: So the consolidated reports are the collective financial statements of all the individual divisions, therefore gives a complete overview of Morgan Sindall as an entirety: Morgan Sindall Group.  The “Company” however was a little more confusing for me to identify.  I assumed that this was made up of the individual division’s Financial Reports however – only one of each was listed.

I discussed this with my father and I was then able to work out that this was the Company of Morgan Sindall as the “Parent Company” eg the worth of the company in relation to its share value worth.  I can’t exactly explain this better at this stage but this is my understanding and I know this will be worked out in more detail as we progress through the course.

What I found interesting is that they presented all “CONSOLIDATED” reports of the Morgan Sindall Group and “COMPANY” reports (only Balance Sheet and Changes in equity) for the Parent Company.  I need to go look further into the IFRS’s however I am also covering this in another ACCT subject at present.

KCQ: Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRS’s) as adopted by the European Union.
**LIGHT BULB MOMENT: I have just learned about this in ACCT19062: Issues in Financial Reporting

KCQ: The parent company financial statements have been properly prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework
**LIGHT BULB MOMENT: I have just learned about this in ACCT19062: Issues in Financial Reporting 

KCQ: The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation (note to self: I need to go read this!)
**LIGHT BULB MOMENT: I have just learned about this in ACCT19062: Issues in Financial Reporting 

KCQ: The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and Financial Reporting Standard 101 Reduced Disclosure Framework 
**LIGHT BULB MOMENT: I have just learned about this in ACCT19062: Issues in Financial Reporting

Q: What is the reduced disclosure framework? When and why?

Q: Is this different to Australia??

Q. What is ‘working capital as a proportion of revenue’ and why is it highlighted?

A: let me get back to you on this…..

Q. Adjusted operation cash flow as a % of adjusted operation profit and why is it highlighted?

A: need to do some more reading!

Q: Amortization?

A: costs associated with intangible assets over a period of time, similar to depreciation of a tangible asset; or paying off of debt with a fixed repayment schedule in regular instalments over a period of time. In practical terms we are most likely to encounter amortization with a mortgage or car loan.

Q: What is capital redemption reserve? Hedging reserve? Translation reserve?

DECISIONS

Decision making questions for me…

·       Are they making a profit?

·       Trends in profit

·       Share price

·       Investments

• ·       Decision 1: are they making a profit – YES

• ·       Decision 2: is profit increasing – YES – shown by 2012 to 2014 and with the increase in the share prices as show by the share price graph.

• ·       Decision 3: Share price – yes its increasing slowly with trends over time also showing this long term. Shareholders should be happy as a dividend was paid and although the dividend was maintained the dividend was not decreased.

• ·       Decision 4: Investments – yes – the company is investing in itself (and its employees) and has a planned future projection of investment particularly in the Regeneration Division of the Company.  This shows innovation and diversification.

 Other key Notes:

1. With the decrease in profit by the construction division, Morgan Sindall was abot to alleviate this with a substantial profit in the Regeneration Division to still maintain and increase in profit from 2013 to 2014.

2. Continued investment in innovation and employees is of particular importance as this sees growth for future prosperity to invest in the company's future.

3. They pride themselves on Safety and Sustainability which are key investment pints for clients in the future to reduce injury on both people and place.  Positive outcomes can be demonstrated in the Strategic Directions highlights in previous blog!

4.  Morgan Sindall remains a very liquid Company and is able to pay out liabilities if operations were to cease thus reducing negative impact on shareholders.

KEY CHALLENGES

CONTINUED PERFORMANCE

I believe a key challenge is being able to continually slowly increase performance of the company back to that of 2008.  From a shareholder perspective this would be paramount.  The issue and challenge would be can this continue given the recent economic climate eg Greece and the flow on effect economically around the world we are currently seeing; as well as the political climate to a lesser extent given the civil and political unrest due to ISIS.  It is quite interesting seeing how this could potentially affect economics globally and with large companies.  For example, where would cash flow of sectors be transferred if a war broke out? What about human resources? How would these be affected? What would be the priority of sectors in this situation?

INFLATION

As already mentioned the Group’s profitability was adversely impacted by a small number of construction contracts in Construction & Infrastructure, due to inflation costs and some unintended resourcing requirements.  Luckily this was offset by strong performances from Fit Out and Urban Regeneration.  What is not to say the same for this current year?  However, the company has stated that it has identified this as a potential due to the projects being ACCEPTED in 2012 and 2013 and have anticipated these financial changes in future financial planning with contingencies.  Seeing how this will impact in the next year’s report will be of interest to see how their contingency strategies work.

OVER CAPITALIZATION

Another challenge may be over capitalization risk. Maybe it is just me being more conservative?  Has the company grown too large? Have they over committed themselves?  Are they under resourced?  It is seen very often in small business that they tend to over commitment too quickly and too soon resulting in increased liabilities and a reduced commitment to re-invest.  Small market changes can dramatically affect small, and large business to an extent.  Given the local situation in Mackay and Coal field districts, the downturn in coal price has seen a dramatic economic downturn in business and business operation with many small business’ folding due to over commitment coupled with the down turn to continue to viable operations.

Obviously large companies project to the future which can assist in this however smaller companies should also do this.  The benefit with large companies that can generate such a large profit, is that they can withstand a downturn over a short period of time and recover due to investments.  This is demonstrated in the 2008 recovery from the GFC.  I would have faith in this company to again do the same if a similar event occurs.

 A personal example of this is in our current family business where we had predicted the downturn so made adjustments and utilized our contingency plans of having to cut staffing for a period of time.  Thus, saving on once expense which has resulted in a similar net profit to the previous financial year.  Having identified reduced potential clients at the commencement of the financial year we were able to alleviate some of the negative effect by increasing fees (in line with usual annual increases and CPI) but reduce expanses such as wages.

Larger businesses also undertake these activities however on a much larger scale and may also sell off assets to accommodate potential losses.  Morgan Sindall does have the capacity to do this and is a quite liquid company at present.

(ok so I couldn't find a funny overcapitalizing image - this will have to do LOL)

COMPETITION

Competition may be another key challenge I the future.  Being one of the largest in the construction industry I get the feeling that the company prides itself of on its outcomes, however they also pride themselves on way they do business by focusing on their clients, achieving safety and sustainability standards, investing in employees and encouraging innovation.  Having a good standing in the community, being well known for positive outcomes such as these is very beneficial, however continuing to maintain and raise the standard given such a competitive industry and world we now live in would be a challenge.

A fellow student, Nick, has a similar company based in the UK, so maybe these companies are in competition with each other?  Here is his link.  Nick did a search re Opus v Morgan Sindall but didn't come up with anything.  Would be interesting to know more locally.

A potential might be to widen the scope for business and investments to open up new pathways and opportunities, thus more financial opportunities in the investment sector to generate income other than from operational income.

CLIMATE CHANGE IMPACTS

Not financial however Climate change is now an ongoing concern for larger companies to reduce the carbon footprint.  Morgan Sindall has this as a large component of their strategic plan and can therefore track against these KPI’s.  They have a  resolve to identify and manage risks associated with climate change and continues with their third year running as the highest-scoring construction company in the CDP’s UK Climate Change Report 2014.  Maintaining this will be the challenge.

AM I HAPPY WITH THE COMPANY

Yes!

I was a bit hesitant at first given I had no idea of the company, it was an offshore company based in the UK, thinking about the differences in accounting frameworks and standards and I have to change currencies seemed a little daunting.  However, the annual reports and website were VERY easy to use and engaging.  I would have preferred Leighton’s for example as I am aware of them plus I have a number of clients who are shareholders, so can relate more.  Once I started reading and applying the new knowledge and discussing it with people and my father (and mentor) it was really interesting.  Stepping outside the box of comfort really does help you engage and learn and you have no option BUT to learn

Based on both the quantitative information (financials) and the qualitative information provided in the grey material (You-Tube, articles, the website, their values, they way they conduct business) I am also very happy and it seems a good company to work for.  

Perhaps they might be hiring graduate accountants in the near future???

You-Tube: Morgan Sindall Case Study - safety

You-Yube: Morgan Sindall All Stars - staff recognition

Article: Contract Drag - recognition of the project slip discussed above

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MY REVIEW OF STEP 2:

This step of the assignment has been VERY interesting!!  I was not sure how much detail I was to put into this however as I began I get right into my Company and learnt so much more.  I had questions that I answered myself but some I am yet to read up on given my time restraints.  I know I have spend well and truly over the suggested time the martin placed in the assignment notes... but I feel that it has given me a broader understanding.

What has also helped me is that I am in business and am in the early stage of "learning the ropes" form my father to take over our business when he retries.  So it has helped me greatly being able to study this subject as well as have the practical application.  Having over 40 years of experience is also very helpful at your fingertips and we have had some GOOD discussions and we have been able to utilize out own business financials in this assignment.

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