Morgan Sindall Group H1 2025 Earnings Call Transcript

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Provided by Quartr
July 29, 2025

Key Takeaways

  • Positive Sentiment: Revenues rose 7% to £2.4 bn and profit before tax and amortization jumped 37% to £95.9 m, driving an 80 bp margin improvement and a 20% interim dividend increase to £0.50 per share.
  • Positive Sentiment: Secured order book climbed 39% to £12 bn and, including preferred bidder positions, the total pipeline reached £17.8 bn (+24%), underpinning strong medium- and long-term revenue visibility.
  • Positive Sentiment: Fit Out and Partnership Housing outperformed with Fit Out profit up 41% to £58.1 m at a 6.9% margin, and Partnership Housing profit up 13% to £13.2 m backed by a £2.2 bn secured order book.
  • Neutral Sentiment: Net cash fell to £390 m (from £492 m) reflecting continued reinvestment into partnership businesses, with average daily net cash still guided above £330 m by year-end.
  • Positive Sentiment: Medium-term targets upgraded as Fit Out profit guidance rises to £80 m–£100 m and Construction revenue target increases to over £1.5 bn, signaling confidence in future growth.
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Earnings Conference Call
Morgan Sindall Group H1 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 3

Welcome everybody to our half year 2025 results. Before we go in and talk about borrow's, another record first half, I'd very much like to say a big thank you to all the teams in our businesses all over the country who actually made these results. Kelly and I are just here to report on them. Big thank you, everybody. I'm just going to say a few words with highlights. Kelly will go through the financial and operational review. I'll then come back and talk a little bit about markets and outlooks. The main show of the day will be Steve Coleby talking about Partnership Housing, the MD of Lovell, and Phil Mayall, the MD of Muse, talking about Mixed Use Partnerships.

Speaker 2

Muse.

Speaker 3

I'll do a quick summary and then straight into questions and answers. If we look at the group highlights, turnover up sort of a modest 7%, but more importantly the profits up 37%, which actually gives us a gross profit margin of 4%, a full 80 basis points up on last year. That's a really important thing for us. Order book and preferred bidder up 24% since this time last year. We've been able to put the dividend up £0.50. As you see, the cash is broadly neutral as we've been reinvesting retained profits into the partnership business. We are always looking forward, we're always looking long term, but I thought it's just worth putting a graph up to actually show what's happened over the last 10 years.

Speaker 3

Because we're a company that's always looking long term, I think very often the way you should judge us is on what we're doing for the long term. Obviously over the last 10 years we've had to deal with things like Covid and a couple of other things, but we still had a sort of compound growth of 18% a year on the profit before tax and just over 16% on the dividend. I'd now like to hand you over to Kelly.

Speaker 4

Thank you, John, and good morning everybody. Today's results continue to represent our strong track record in delivering growth over the long term. No apologies for re-emphasizing some of our key financial highlights, and I'll go into some of the detail in a short while. Revenues are up 7% to £2.4 billion. Operating profits rose 40% to £91.8 million, accompanied by a margin at 3.9%, up 90 basis points when comparing to this time last year. That's been followed by a continuation in our elevated interest rates on our strong cash balances, resulting in a net interest income in the period of £4.1 million. Equally, that's led to our profit before tax and amortization increasing by 37% to £95.9 million with an equivalent PBTA margin of 4%, up 80 basis points compared to this time last year.

Speaker 4

Based on these strong financial results, we have today announced a 20% increase to our interim dividend, dividend rising to 50p per share. In summary, a really good set of results here. In fact, very strong financial result, underpinned not only by our significant growth, but also margin expansion. Let's take a quick canter through our performance by division, and many of you will know I'll go through the split of it in a little bit of detail shortly. Once again, Fit Out has delivered a significant contribution to the group's results, profits up 41% to £58.1 million. That's been followed by strong contributions from Construction, Infrastructure, and Partnership Housing. Despite the slow recovery in the housing market, in Mixed Use Partnerships, it's recorded a small operating loss in the period as it's had fewer projects on site this period.

Speaker 4

In Property Services, we've returned a modest profit in the first half as it's continued to stabilize its business activities in the first six months of this year. Overall operating profit at £91.8 million with an operating margin of 3.9%. We've also enjoyed substantial growth in our secured order book, increasing 39% to £12 billion at the end of the period. That's been followed by almost a further £6 billion of work at preferred bidder stage, with growth coming across our entire diverse portfolio. What this also leads us to is a collective total of £17.8 billion of work, 24% up compared to this time last year, providing us with an incredibly strong platform to deliver our future revenues over the short, medium, and long term.

Speaker 4

Now, many of you will know that the full length of our frameworks, and indeed the future phases of our development agreements, are not included in either the order book or our preferred bidder positions. It's only when we've got much more clarity and visibility of our capital projects that fall within the frameworks, or when we've got planning at a suitably advanced stage for our development agreements, do they then fall into these numbers. Let's just switch lanes a little bit. If we look at our net cash at the start of the year, we opened with £419 million, £492 million.

Speaker 4

If we wind forward now to the end of the period, you will see that there's £102 million net cash outflow, resulting in a net cash position at the end of the period of £390 million, completely aligned in terms of the outflow to the capital allocation strategy and hierarchy which you see at the bottom of this slide. A few really important observations to note. Firstly, our operating cash outflow in the period was £17 million. That compared to £36.1 million this time last year. Some of you may well spot, secondly, that the working capital movement for our Construction Services and Fit Out businesses may seem a little low, but it's entirely aligned to the seasonal profile that these businesses experience in the first half of the year. Thirdly, we have invested £128 million into our partnership businesses to drive long-term growth.

Speaker 4

Finally, we have returned £42 million to our shareholders by way of the 2024 final dividend. If this slide, which many of you know, really represents what goes on in the business on a day-to-day basis when it comes to cash, you'll all be familiar. The dark grey line really charts that day-to-day position all throughout 2024, and the green line sets out the first six months of this year. Big takeaway here: it's broadly similar. However, our average daily net cash has dipped slightly to £354 million compared to £372 million this time last year. That really is a function of the continuation of our investment in partnerships. What I find particularly interesting is when you look at the highest point of our cash, it's £499 million at the start of the year. The lowest is £270 million in May.

Speaker 4

What that really signifies is, in a really short period of time, how significant the cash swings can be. For a business of our size and scale, this continues to underline the importance of us holding substantial levels of cash at all times to ensure that we are able to make the right decisions for this group for the future. If we look forward to the end of this year, we expect the guidance for the average daily net cash to remain unchanged. It will still be in excess of £330 million as we continue to strive forward with our strategy to invest in partnerships. In summary, strong growth in profit before tax, a strong cash position enabling us to continue with our journey to invest in partnerships, a strong and growing and high quality secured order book, followed equally by a strong preferred bidder position.

Speaker 4

Let's take a little bit more of a look now at our businesses. Starting with Partnership Housing, this division has continued to strengthen its long term partnerships with the public sector in the period and notably that's been evidenced through the award of two long term partnerships, the first being with Cardiff and Vale of Glamorgan Council and the second with Barnet Council. Collectively, for these two schemes we expect to build and deliver around 3,500 homes over the next eight years. Revenues in the period grew steadily by 6% to £405 million, whilst demand for contracting work with the public sector continued to be robust and strong and increased by 21% in the period to £311 million.

Speaker 4

Now, despite the revenue mix profile being once again weighted towards contracting and against the backdrop of a slowly recovering healthy market, this division has continued to deliver strong profitable growth in the period. Profits rose by 13% to £13.2 million, but we also saw margin expansion by 20 basis points, with its margin rising to 3.3% with a secured order book of £2.2 billion. With a further £2.8 billion at preferred bidder stage, we remain confident and excited about the medium and long term growth prospects for this division. If we look forward towards the end of the year, the average capital employed is expected now to be in a range between £400 million to £430 million, as we are expecting to continue with our investment journey in this division.

Speaker 4

The Mixed Use Partnerships I mentioned earlier, it's reported a small operating loss in the period of £1.5 million, but notably that includes around £6 million of investment costs relating to secured schemes which have yet to start on site and therefore not yet generating return, as well as supporting those schemes that represent future opportunities for this division. To put a little bit more color and context around this, at the end of the period the division had six projects on site. By the end of 2026, we expect that to be closer to 21, but the division's been busy. In parallel, it's continued to build upon its prior year successes through the conversion of five schemes which were previously at preferred bidder stage and are now signed development agreements. At the end of June, the division had a secured development order book of £4.6 billion.

Speaker 4

That's 150% up on this time last year and with a further £700 million at preferred bidder stage where it's one on one again. If we look forward to the end of the year, its average capital employed is expected to be between a range of £115 to £125 million. Now Fit Out has delivered a standout significant market leading performance. For the first six months of this year, its revenues increased by 33% to £838 million. Its profits rose by 41% to £58.1 million, strongly influenced by exceptional volumes and operational leverage, which resulted in an operating margin of 6.9%. Underpinning the strong financial result is the division's tenacity, its laser focus, its attention to detail when it comes to quality operational delivery and of course the customer experience. It finished the period strong with a secured order book of £1.4 billion, 19% up on this time last year.

Speaker 4

In Construction, the division's continued to maintain its strategy around its approach to strong risk management, starting right from the project selection stage through to operational delivery through to final project handover. It's this foundation that has enabled the division to deliver strong profitable growth in the period, with a real quality to its earnings. Profits rose by 14% to £16.1 million with a margin of 3.1%. It's been busy in the period it's continued with its strong momentum of winning new work. At the end of the period it had a secured order book of £1.1 billion, with a further £1.4 billion of work at preferred bidder stage, bringing its collective total to £2.5 billion of work to deliver in the future. Many of you will know 90% of its work is for the public sector, and education continues to remain one of its strongest subsectors.

Speaker 4

In the period we have seen increasing exposure, positive exposure to subsector spaces such as judicial and defense work. In Infrastructure, it's continued to manage and deliver complex projects while retaining a strong discipline and risk management. In the period it's commenced a number of projects which are going through the early planning and design phases, very much linked with significant work winning activities of last year. As a result, we have seen a slight dip in our profits for this division, down 7% to £18.4 million, but nonetheless a significant contribution to the group's results. We also saw a slight margin expansion by 10 basis points up to 3.8%. It finished the period strong in maintaining a very solid and robust order book at £1.9 billion, with a further £600 million of work at preferred bidder stage and in Property Services.

Speaker 4

After its successful conclusion of its business remediation program in late 2024, it has continued to stabilize its business activities in the first six months of this year, resulting in a modest profit of £0.5 million. It's also continued to rebalance its portfolio, moving away from reactive maintenance work and moving much more towards planned maintenance and decarbonization work, characteristics very much shared with our Construction activities. As a result, from January 1, 2026, we will be fully integrating Property Services into the Construction division. Until then, until December 31, 2025, this division will continue to remain a standalone division, but still be under the leadership of Pat Boyle. This concludes the financial and the operational review. We will now move on to markets and outlook for John.

Speaker 3

Thank you, Kelly. If we look at our markets, as you can imagine, we have sort of headwinds and we have tailwinds. I think overall it's a net positive set of conditions. If you look at Fit Out, we've certainly got some tailwinds. More and more people are returning to the office. More and more people are now having to make their office better to attract people back, and in many cases they're finding more people are coming back to the office than they've got seats for. We actually think the market there is going to be favorable for a little time. If we look at the spending review, the £16 billion for National Housing Bank is very positive for us.

Speaker 3

That is actually government investment rather than government spending, and that is money that they're looking to spend quite quickly or very quickly by government standards, in order to get a lot of sites going that would otherwise be unviable. Very positive for us, as indeed was the 10-year rent settlement, which actually gives a lot of stability to housing associations to be able to plan their future incomes or indeed to borrow more money if required. Clearly the headline that everyone's talking about is the £39 billion. The reality is that over a long period of time it's not really new money, and most of it is in the next parliament anyway. Although it's nice to have, it's not that exciting for us. I thought I should mention it.

Speaker 3

Obviously the extra spend for Construction and Infrastructure is very helpful for both the Construction company and the Infrastructure company because they're two spaces that we are particularly strong in now with partnership. There's a lot of partnerships out there at the moment that we are pricing, negotiating, and there's quite a lot that we see coming. That is actually really good news for us. I think there's going to be times when there's a lot of partnerships coming onto the market and times when there's not going to be a lot coming onto the market. Because our partnerships go for so long, you could have two or three bad years, but we're not seeing that at the moment. Just the opposite. Our planning reforms are clearly important for all of our group companies, Infrastructure, Construction, as well as obviously housing and development.

Speaker 3

Although we've seen a modest impact to date, the sense of direction is really helpful, and we think the government really is going to improve it over the next two or three years. If I talk about headwinds, clearly the housing market is not as strong as we would like or indeed as strong as we expected at the beginning of the year. That is no different to what you'd be hearing from the normal house builders. Interest rates not coming down as quickly as we hoped is definitely another headwind. Not only does that affect the housing market, it affects the viability of a lot of schemes which leads to Construction, Infrastructure or indeed development work. For Muse, GDP growth is really important for our type of business and the fact that GDP growth is less than perhaps we hoped for is another headwind.

Speaker 3

Definitely overall we got net positive conditions, so we're feeling okay. If I look at the medium term targets, you might remember we upgraded four of them in February when we had our full year results. I'm pleased to say that perhaps quicker than we expected, we're upgrading another two today. Fit Out was previously £60 million to £85 million and we're upgrading it to £80 million to £100 million in the medium term. With Construction, back in February, we increased the margin aspiration in our targets. We're now increasing the turnover from in excess of £1 billion to in excess of £1.5 billion. Clearly, probably half of that is because Property Services is going to be incorporated into Construction from 1 January. The other half is definitely an improvement in our expectations of what Construction can do over the next few years.

Speaker 3

If I move on to the outlook by division, Partnership Housing, we do expect solid profit growth this year, but the ROCE is going to be just slightly less as we're continuing to increase to invest. Mixed Use again, another business which we're investing heavily in and that will be close to breakeven this year. With Fit Out, we're not changing our expectations on the profit, but even so, the profit that we were already expecting is going to be higher than the top end of our revised target range. I think what we're saying is that although we feel good about Fit Out going forward, probably the market now is very toppy and it's still going to be a good market, but probably not as good as what we're experiencing at the moment.

Speaker 3

With Construction, the margin is going to be the middle of its range with revenue in excess of £1 billion. Infrastructure again, margin to be in the middle of the range with revenue below a billion, just slightly below a billion, and very modest profits in Property Services. Before I hand over to Fin and Steve, I'd like to just talk about the differences between our Partnership Housing business Lovell, and our Mixed Use Partnerships business Muse. What they do is quite different, how they go about it is quite different, and how they make their money is quite different. Increasingly, they are coming together to work on schemes where, quite frankly, what we have to offer is very, very strong indeed. The big difference is Lovell makes its profit from selling houses and contracting. Muse makes its profit from its share of equity and development management fees.

Speaker 3

Lovell is a developer and a contractor, whereas Muse is a developer only, often using Morgan Sindall to do the building work, but not necessarily, far from it. In fact, it's probably only about 20% is done by Morgan Sindall. Lovell has the minority of its schemes forward funded because it's predominantly selling individual houses. With Mixed Use, the majority of what they do is forward funded. I think it's interesting that the order book and preferred bidder is pretty similar between the two, but because the Muse schemes last longer, it will have less capital employed. I'd now like to hand you over to Steve from Lovell, Managing Director of Lovell.

Operator

Thank you.

Speaker 2

Good morning. As John mentioned, Steve Colby, Managing Director of Lovell. I've been in role for seven years now since joining the business back in 2018. As John mentioned, Lovell works in partnerships with local authorities and housing associations to deliver affordable homes, both as a contractor and as a developer. Over the last four years we've seen a considerable transformation to our business. If you go back to 2021, our combined order book, which included preferred bidder status projects, was at around £2.8 billion. At that stage we had an average capital employed of £156 million. We built 3,100 homes from eight decentralized regions. If you move progressively forward to 2024, the change has been quite significant. Our equivalent order book then was at £4 billion and we'd increased the number of our operational regions to 11.

Speaker 2

This allowed our geographical coverage to be extended to virtually all parts of Great Britain. Importantly, it gave us the capacity for future growth. The size of our active sites grew, as did the number of them, which increased by around 40%. Collectively, this allowed us to build a little over 5,100 homes in the year. 2024, of course, was a year where there was a continuation of the softness in the housing market. We saw this as an opportunity to continue to invest selectively. Both the medium term and the long term fundamentals for growth in Partnership Housing remain very, very strong. This resulted in our average capital employed increasing to £338 million at that point. If we look back at this period of sustained growth and investment, our CAGR for revenue and for profit was equally strong at 18% and 22% respectively.

Speaker 2

As we head further into 2025, we finished the half year point with a combined order book of now £5 billion. In addition, we have a healthy pipeline of future phases which come from our existing established partnership arrangements which have not yet been included in that headline number. We'll only do so, as Kelly mentioned, once we have increased visibility and once we have greater certainty on planning.

Speaker 3

And.

Speaker 2

I guess that's an important point to pick. Why are we now at the £5 billion? First to note is we've got relatively limited national competition. I think you'll have seen that our brand has become very strong and we are respected, we have a respected reputation. Morgan Sindall's balance sheet has never been more important to the Lovell business. First of all, it funds us, but for our clients it is a huge, huge comfort to them and they place a big value on that when placing orders. Over the next few minutes I'd like to illustrate three of our partnerships which will start delivering homes in the near term and in the medium term. It's worth also pointing out that all are expected to deliver returns on or above our medium term targets. Let's start with Barnet Council. This follows a successful tender in 2024.

Speaker 2

It's to regenerate phase one of the existing Grahame Park Estate. It involves the demolition of the 60s and 70s buildings you'll see there and replacing it with 500 new build, social, rent, shared ownership and open market sale homes. Importantly, the partnership also allows us the opportunity to become development partner with Barnet Council on future sites. Already at this early stage, we have visible prospects within the 10 year arrangement of around about 1,200 homes. That would generate a GDV of £500 million. Around half of that would flow into Lovell's books at this stage. Again, keeping our prudent reporting, only phase one of the Grahame Park Estate has been included in our order book. Preferred bidder status was granted in 2024 and we expect to make a start on sites three years later in 2027.

Speaker 2

That three year gestation period is fairly typical of what we would expect to see in a normal partnership scheme within our business. Of course, once on site, workload is secured for several years to come. In 2022 we formally joined forces with Suffolk County Council to form a development alliance. The aim there is to build around 2,800 much needed homes that meet real local needs. The developments are built on council owned land over five separate locations, those being Lowestoft, Mildenhall, Baxter, Westrow and Newmarket. Two of those sites will make a start this year. The remaining three will make a start towards the back end of next year and they will run through to 2039. As typical, this arrangement includes an option to bring in more sites during the 10 year framework.

Speaker 2

Earlier this year, Cardiff and Vale of Glamorgan Council has appointed us as their preferred bidder for a large-scale house building program. The partnership aims to build 2,300 homes. It's across 24 council-owned sites and has a GDV of over £500 million, all of which flows through Lovell's books. Half of the properties that we build will be retained by the councils for social rent and for shared ownership purposes, and the balance will be sold on the open market. With planning permission already in place for a few of the initial schemes, we expect our first start on site to happen this year. As with most of our partnerships, the 10-year arrangement can be extended and additional sites may also be added. Thanks, and I'll now hand you over to Phil.

Operator

Thanks, Steve. Good morning everyone. I'm Phil Mayall, I'm the Managing Director. A little bit about me. I've been in the business just approaching 20 years, starting at the most junior level, working my way through and I've been in this particular role for just approaching two years. As John and Kelly have outlined, as I'm sure you're aware, we're a national Mixed Use Partnerships business. Everything we do is in partnership and we develop property across the range of sectors. We've been in business 40 years, so we have an incredibly strong brand developed over that time, a really strong track record and coupled with the Morgan Sindall balance sheet, as Steve has already mentioned, which is really powerful for us too. We have a real reputation for delivery.

Operator

Going back a couple of years, 2023, we decided that it was time to really start to leverage that brand and that position nationally. We don't really have a direct competitor, so it was time to leverage that. We decided to refocus on larger opportunities. The reason we did that is, one, again, the balance sheet gives our partners comfort that we can deliver over a long term. Our 40-year existence showed that we always stay in schemes. We do everything that we say we'll do, and again, that's a huge comfort to our partners. What it also allows us to do is a lot of schemes have fixed costs regardless of size. It allows us to spread that capital more thinly across individual projects that come out of those schemes.

Operator

It also means that as markets expand and contract, we can bring forward a different range of sectors on one single plot on one overall scheme. It allows us to react to the market as the market's moving back and forth. Finally, what it does is those types of schemes are very attractive to institutional investors who see them as long-term opportunities. All of that coupled together really allows us to focus on hitting that medium-term target we have of 25% return on capital employed. This slide really starts to illustrate for you the beginning of that strategy. If we have a look at the top line, across the top line there you can see the increasing size of order book. That's been a couple of things.

Operator

Firstly, as I say, it's been a focus on larger opportunities, but it also reflects an investment we made starting in 2022, but firmed up in 2023, where we opened in the Midlands, which we thought was a really strong market for us. That's been proven in that we've already secured four developments under development agreement. Again, very much along the lines as Steve's described. We limit the amount of phases that we include in the order book. We're very conservative around that, and we have a team of 14 people that are already helping us to deliver. On the second line, you can see the number of projects we have on site is dropping, and that's simply a result of us transitioning out of those smaller schemes and investing in new schemes. It takes around about two years from inception to bring a project forward.

Operator

As Kelly outlined, at the moment, at the year end we'll end up with six projects on site. By the end of 2026, we expect to be moving towards 21. That isn't from a start today; money's already been invested in those schemes. As Kelly outlined, already £6 million is being invested to bring those schemes forward and our longer term pipeline. You can see that in the capital employed. The capital employed is staying relatively steady, but the projects are dropping because that's where we're putting money into new schemes. Obviously, there's an impact on our return on capital employed in the very short term. As returns are dropping, as we finish schemes, capital is going in, but we expect that then to start to move towards our median target.

Operator

What I'm going to do, like Steve, I'm just going to talk you through three schemes just to illustrate what we do and how these fit into the strategy. These are all schemes that we've secured relatively recently, and they show the breadth of work we do across sectors. The first scheme is a development agreement with Durham County Council at Aykley Heads. This is just up the hill from the mainline train station. We're very keen on developing our own transport hubs because you get to benefit from that transport infrastructure that's already been committed. It will be an innovation zone, an innovation district of around 400,000 square feet. We like this type of work because there are specific occupiers that will take it, and they tend to be the sort of occupier that will fund and own it.

Operator

Therefore, we invest the capital at the beginning to get the scheme moving, and then they come along and fund the buildings as they get built because they want a greater say in the specification and how they work. Here, typically, as well as a kind of illustration of our model, we actually start work. We'll be starting in 2027, maybe late 2026, and that starts by demolishing an existing council facility for which we get paid development management fees. John mentioned on the comparison slide, we earn money from fees as well as profit. The next project I'm going to outline is Mell Square in Solihull. This is one of the projects I referred to earlier that we've secured through our Midlands office. Much like many of our towns and cities, this is a place that's really focused on what's happening in its town centre going forward.

Operator

Now, Solihull, if you're familiar with it, is relatively affluent in the Midlands. In terms of its actual retail offer, it's relatively well populated at the moment, but the council is taking a long-term view. There are two very large shopping centers which clearly will not sustain in the future. They brought Muse on board to help redevelop one of them to a more mixed use location which will drive footfall into the other center. Critically, we will also deliver new leisure facilities, retail facilities, and residential. It's a type of residential that we deliver for build to rent owners and occupiers, but with some potential open market for sale in there to mix the community up, some later living, some key worker housing. The reason for that is it will help drive the local economy. You've got Jaguar Land Rover nearby and some high growth companies.

Operator

Solihull is keen to ensure that it retains and attracts the high quality workforce that's needed to support those. Finally, a very large scheme that we're developing in Slough, and this is one we're developing through one of our two national partnerships. When I refer to partnerships, I'm either referring to a partnership at a local level through a direct development agreement or a strategic national partnership. This is being delivered through our English Cities Fund partnership, which is a 20-year partnership we've had with Legal & General and Homes England. This is a development again, capitalizing on transport infrastructure. Right at the end of the Elizabeth line in an identified growth location, it's a mixed use development of 200,000 square feet, grade A offices, around 1,600 homes across multiple phases. We're going through the master planning phases at the moment.

Operator

We expect to start on site in early 2027 and the initial phases will finish in five to six years after that. It is a long-term project. Again, the same with Steve's team. We're very conservative in what we include in our order book, and then we add as we go along. That's it for news.

Speaker 3

Thank you. Thank you. I'd just sort of summarize where we are. We're an organic growth big story and that's not changing. We might do minor bolt ons if they sort of add to that organic growth, but just think of it as more organic growth, and we've got a long way to go. That strong balance sheet and substantial cash is absolutely fundamental to our core, and we want to hang on to that. I'm pleased that we've been able to increase the medium term targets for both Fit Out and Construction. Following two profit upgrades this year, we're on track to deliver results for 2025 in line with our current expectations. Any hard questions from the team?

Speaker 2

Thanks. Morning. Ainsley Laman from eveso. Just two from me, please. Just on partnerships, obviously some in the sector has been some kind of mixed results, should we say, on the partnership side and with the new government kind of announcements around that, does that increase your kind of expectations for you to put more capital employed in that business? When do you actually expect to see the kind of development demand coming through on the ground to bump that division?

Speaker 3

Are you talking Partnership Housing?

Speaker 2

Partnership Housing, yes. First of all, John touched on the spending review. We see the rent settlement, 10 years, 1% plus CPI, has been a real advantage to Partnership Housing. It's making housing associations have a much firmer footing on the ground in terms of Lovell's partnership model. I think we can only talk about ours. It's obvious to see that the contracting aspect of it has helped us out significantly in what's been quite a prolonged, difficult period in the housing sector. Just on Fit Out, obviously you had the kind of disruption in the competitive landscape. I just wondered if you could provide a bit more color of how that's settling down. Is the order book now kind of where you'd expect it to plateau and maybe edge back a bit because some of that work that you've won from the one that went bust eases.

Speaker 3

It's probable that the order book is higher than I might have expected six months ago. We do have some very strong competitors who are giving us a run for our money.

Speaker 3

Hi, Stephen Rawlinson from Applied Value. Can I talk a little bit, if you don't mind, about risk? Because you've got this long order book and you've got prices, obviously build costs rising, you've got variations to take into account, particularly in mixed use. Could you just sort of talk us a little bit through? I mean, I know it's a results meeting, but nonetheless it'd be very, very helpful because those order books are getting bigger and longer, and as such, therefore the risk levels rise and variations, particularly in mixed use on existing pre-existing sites, gives you a high level of risk.

Speaker 2

Can you just sort of give us.

Speaker 2

A bit of a clue as to how you might be tackling that, and to what extent your results are insulated from any concerns that we might have about variations?

Operator

Can you clarify on the variations?

Operator

Just finding a bomb underneath Slough or something like that, which I'm sure John Betjeman would love to have.

Speaker 2

That sort of thing.

Speaker 2

You know, there are things that go wrong in long-term projects, and these are increasingly long-term projects that you're engaging in, and therefore, obviously, risk levels on variations that you might find on sites and so forth increases.

Operator

Thank you, thank you for the clarification. First of all, in terms of the reference to the long order book, as I mentioned a few times, we actually limit the amount we put in so that we can make sure that as we progress through a scheme, as we move forward, we can expand the order book rather than going the other way, finding the proverbial bomb and then coming back in. We've been doing this as a business for 40 years. Those things that you refer to in the ground and those challenges have been. We've got a lot of DNA in terms of delivery and in terms of taking a long-term approach, we can focus on that and resolve those issues as they come along rather than eggs in all one basket and it be a big issue that undermines us. We're pretty well versed in responding.

Speaker 3

If I may add, a bit of critical thing is when we have a development agreement, that actually is the mechanism for agreeing the price that we pay for the land in any phase. We don't have to progress with any phase unless it's viable. That is the big protection.

Speaker 3

In Construction, you've increased the revenue target by half a billion on a pro forma basis. About £200 million will come from Property Services being in part of that envelope. There is a little bit in the text about your feeling of confidence to get what is in fact a 33% increase in the underlying Construction revenue. Can you just talk us a little bit through the level of confidence that you have about that in this meeting, please?

Speaker 3

Yes. Clearly, we will see quite a bit of progress towards that this year. It's not as big a jump from the run rate as it might appear. The order book is going up, and our market share is continuing to increase and has done consistently over the last few years.

Speaker 4

I think I'd add to that. I mean I said earlier the order book is at £1.1 billion, but actually, an important point to note is a preferred bidder position of £1.4 billion, and this division has a very strong track record of converting in the high 90%. I think you should look at it that way, also the work it's been winning and the market share it's been gaining.

Speaker 3

It's also been strengthening the regions where the market share is less over the last few years. It's still market share to go for.

Speaker 4

Oh, sorry, Allison from Bank of America, two following up questions on the Fit Out and Partnership Housing. On the Fit Out, I wonder, because previously you mentioned the higher competition and also margin to normalize, but right now it looks like the prospect is better. Do you expect the margin normalization probably will take longer time to realize, the first one? The second on the Partnership Housing, because you also mentioned the £39 billion funding from the government and in my understanding is those housing associations and also builders will start bidding the funding, maybe starting in the next three months or so. Do you guys have a plan or the target, like how much funding you actually want to get? I will take the Fit Out and perhaps do you do Partnership Housing? I think the reality is the normalization is coming.

Speaker 4

It's really hard to identify precisely when. What I can guide you to is that 6.9% is still driven and influenced strongly by the exceptional volumes and therefore leverage we're gaining from our overheads. You should still think about your normal operating margin somewhere in the corridor between 5% to 6%. Take the mean of 5.5% and just.

Speaker 2

On the 39% billion points, I think it's fair to say for all of our house building businesses that gestation period is around about three years from first of all applying for planning permission through to making a start and delivering product at the other end. Whilst it is backloaded.

Operator

In terms.

Speaker 2

Of the government spend and review, it does give local authorities, it gives housing associations the confidence now to start building up the workload for the future, knowing that it takes three years to make a real start. Johnny Kubra from Deutsche Nemas, thanks for the presentations. Firstly, on partnerships, perhaps for Steve, just interested to hear whether you think the contracting market, within Partnership Housing, whether the contracting market is growing or whether.

Speaker 2

It's an impact of Section 106 completions being lower.

Speaker 2

I think there's two reasons for the growth that we are experiencing. First of all, you will have all seen that there was a number of SMEs who unfortunately fell into administration, and we've obviously benefited from that. As we sit now, I see greater growth in the contracting element, partly because of the spending review and confidence in the housing associations, and partly because a lot of workload has been held up with building safety gateways and the like, and those are starting to now move their way through. That's allowing us to just see a little bit more sight on contract and work. Thanks.

Speaker 2

Perhaps to follow up on the mixed.

Speaker 2

tenure side, do you have visibility of when those revenues might grow, and was it a surprise to see them lower given the market was recovering, albeit at a slow pace? I think you're all aware that our business strategy is to move from a contractor majority to a mixed tenure majority. We've got the pipeline visible to allow us to do that, but obviously we're waiting for market conditions to press the button and make that change. Thanks very much.

Speaker 2

Perhaps also a question for.

Speaker 2

Phil on Muse. Just interesting. I mean, John mentioned that at the moment there are a lot of schemes coming to market, and that might change. Why do you think so many are coming to market at the moment? Is it coincidence, or is the.

Operator

Is there anything else in terms of partnerships, in terms of opportunities? I think it's a combination of things. You're seeing things like the Solihull example where you've got property that is out of date and needs repurposing, needs redeveloping. You're seeing an increase of that as the structural shift you're seeing through residential, through the change in the retail sector. We're seeing other things like more recently there's been a growth clearly in logistics post Covid, so there's some drivers there. This is where our business complements with Lovell, also a shift towards urbanisation of residential. The residential we do is mid to high rise in town and city centres and particularly in places like Manchester, Leeds, scheme in Bradford, we're seeing that. It's a combination of factors that's driving it.

Speaker 2

Thanks. Thank you. Hello, it's Ed Press from Bamberg. Firstly, in relation to Partnership Housing, you've got a target of 8% margin. How do you bridge that gap between where you are now in the context of there's a growth in contracting, which presumably puts downward pressure on it, and then the big growth in affordable housing? I'm going to guess that affordable housing commands lower margin. Do you therefore need a big recovery in the housing market essentially in order to achieve that 8%? It's twofold, it's partly performance. We believe that the workload that we've got in our pipeline now will generate greater returns than we've got, but also it is moving that mix back to a mixed tenure side of it. We're talking about the medium term here.

Speaker 2

There is improvement in the housing market, and we've got confidence therefore that we will hit our medium term targets.

Speaker 4

I'd just add to that, Steve. The strategy which we publicized is opening larger sites, which means from a mixed tenure perspective, we'll have a higher proportion of work, volume of work going through market sales, which does carry a higher margin. The blend of everything gets us in the medium term closer to 8%.

Speaker 2

Thank you. Alice Stewart from Progressive. A couple of broadish questions. First on Partnership Housing, in terms of the volumes, it's interesting to see on your wave diagram that over the four years it was eight regions, nine, 10, 11. Is it going to continue in that sort of trajectory? How many regions are you going to get up to, do you imagine you'll get up to and will the actual completion volumes follow that path? You say you've got a target 3,500 over eight years. What's going to be the run rate towards the end of that and where could it go?

Speaker 4

Can I just clarify before Steve answers? The 3,500 just relates to two partnership schemes being Cardiff and Vale of Glamorgan Council and Barnet Council. Just those two got a target for the.

Speaker 2

For the eight years now on the region point, we're done for now.

Speaker 3

We've been through the learning curves.

Speaker 2

We feel as if we've got enough capacity to feed that growth. Some of our larger partnership schemes allow us to almost have a bolt-on to a region. You still have your overhead structure, but it can be run as an addition to rather than instead of the workload. We're done for now, should stay steady-ish. In the medium term, we'd expect much.

Speaker 3

More volume through our existing number of regions.

Speaker 4

Leverage from the regions we have. We purposely created capacity knowing there was this bow wave of work coming through Amista.

Speaker 2

We've been building strong teams who we believe have got more capacity in them. The second question was on defense. Imagine there are very big opportunities and they'll cross a few of your divisions. Can you just talk us through that a bit?

Speaker 3

I think predominantly it's going to be Construction, Infrastructure, the defense. There may be a little bit of housing as well. Yes, but predominantly those two. Any other questions? Thank you very much indeed for your time, everyone.

Speaker 4

Thank you.

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