28/04/2008
Manchester-headquartered Morson Group, one of the UK’s largest and longest-established technical staffing companies, supplies more than 8,500 highly skilled workers to sectors ranging from aerospace and rail to defence and nuclear power.
Led by chief executive Ged Mason, the company has provided contractors on long-term placements to some particularly high-profile infrastructure and defence projects, among them Heathrow Terminal 5 and the Joint Strike Fighter project. Even those unfamiliar with AIM or the particulars of technical staffing might recognise the Morson brand, since the name adorns the shorts of Stockport-born boxing legend Ricky Hatton.
Morson, which joined AIM in 2006 by way of an oversubscribed placing at 160p that raised £36 million, commands a stock market rating which is anything but punchy, with its discounted valuation mirroring share price falls within the quoted recruitment sector. Yet the market has misunderstood the fundamentals of the story by associating Morson with such companies, whose earnings are typically subject to the fee swings of the economic cycle.
In fact, Morson is a very resilient company whose prospects are underpinned by long-term contracts with large companies in sectors where demand is high and ongoing spend looks assured. All of this adds up to a business with strong growth prospects, great visibility and a highly defensive look to it.
Strategy
The management’s two-pronged strategy of organic and acquisitive growth has served the company well, with Morson having delivered a compound annual growth rate (CAGR) of 20 per cent over the past ten years.
This strategy remains unaltered, with the directors looking to drive growth and quality long-term earnings through their recruitment operations and Morson Projects, the high-margin provider of engineering design consultancy services.
Organic development is the focus for growth, since opportunity abounds in a £3.1 billion, highly fragmented UK technical staffing market in which demand is buoyant and skilled workers are in short supply. Morson has plenty to play for, speaking for a mere 12 per cent of the market and, as it grows its market share, margin enhancement (in part through the growth of Morson Projects) represents an increasingly important strategic strand.
Within its chosen markets, the company has already built in strong earnings visibility, while market share gains should arise from a notable trend in the market of clients increasingly preferring to partner with larger suppliers.
Moreover, as Mason explains, ‘We have long-term contracted revenues in projects related to infrastructure and maintenance, which gives us lots of visibility. We have a good business spread in some hot sectors. We saw 36 per cent growth in rail last year – you can’t stop maintaining the railways just because there is a downturn – 25 per cent growth in construction and 17 per cent growth in aerospace and defence, as well as growth in oil and gas, albeit from a low base.’
He further enthuses, ‘Over the past ten years, we’ve enjoyed 20 per cent compound growth and we have grown throughout recessionary periods.’
While organic growth remains the focus, acquisitions and alliances bringing in additional skills and disciplines for Morson to offer clients (or which enhance its geographical footprint) represent another strategic tenet. Last year’s acquisitions – WNH, Pentagon, CTS, Rosta – acquired for an aggregate sum of £6.9 million, brought in £21 million of turnover, took the total number of contractors on the books to 8,900 and contributed gross profits of £2.8 million to last year’s financials.
‘Our acquisitions are rebranded as Morson,’ explains Mason, ‘because this gives them clout and the ability to deliver added-value services as part of the larger group. There is still a vast number of owner/occupier acquisitions for us and although we’ve been in digestion mode lately, we have the firepower to do deals.’
Management
The non-executive chairman of the group is trained engineer Gerry Mason, who founded the business back in the late 1960s. Under his leadership, the business grew into one of the UK’s leading providers of technical staff and, although Mason retired as an executive director in 1999, he retains a wealth of industry experience and contacts.
Hot seat incumbent since January 2005 and a fellow major shareholder, his son Ged is now the figurehead, having led the company through the AIM IPO process. Managing director since 1999, he joined Morson in 1986 following university and a period learning the ropes at a technical recruitment organisation in Canada.
Keeping an eye on costs and heavily involved in the acquisitions drive is Paul Gilmour, finance director. Gilmour earned his accountancy spurs with Touche Ross & Co before joining Morson in the early 1990s. He became finance director in 1993 and has played a key role in the group’s success.
Morson can also call on the considerable non-executive clout of Karl Monaghan, who has worked in the corporate finance departments of a number of merchant banks and stockbrokers, including Crédit Lyonnais and Robert W Baird. During these stints, he spent time advising staffing sector companies. In addition, he is a non-executive director of both CareTech and FDM Holdings.
Ian Knight, an experienced non-executive director with a strong track record of leading acquisition programmes, driving through strategy and overseeing ‘business transformation exercises’, is currently a non-executive director of Mouchel Group, the successful FTSE 250-quoted support services venture.
Prospects
Prospective investors are buying into a business with a formidable recent trading history. Results for the year to December were excellent, showing a 20.5 per cent revenue rise to £394 million, with a modest 5.5 per cent of sales contributed by last year’s four acquisitions. From that top-line figure, Morson achieved 26 per cent growth in net fee income – the recruitment sector’s equivalent of gross profit – to £33.7 million. Pre-tax profits increased by 13.7 per cent to £10.8 million, while rising earnings and management’s growing confidence allowed for a hike in the total dividend to 5.8p (4.5p).
With these eye-catching financials, Morson once again showcased its ability to flourish at any point during the economic cycle.
Market diversity is another strength. In aerospace and defence, where clients include BAE Systems and Airbus, Morson supplies personnel including stress engineers, CAD designers and systems engineers to a broad range of naval, military and commercial projects. Meanwhile, the rail and transport sector encapsulates the defensive nature of
the business. Here, Morson supplies an array of ‘safety-critical’ staff – everything from signalling testers to maintenance operatives – to the likes of Network Rail, Transport for London and Metronet, and is nicely positioned to benefit from highly visible infrastructure and maintenance spend. In nuclear and power, prospects are underpinned by decommissioning and new-build activity in the sector, while spending tied to the 2012 London Olympics represents a terrific opportunity for the building and construction division.
Excellent visibility levels and the ability to deliver sustainable margins add further appeal. Over 80 per cent of Morson’s revenues are governed by long-term contracts, with margins based on framework deals. In 2007, the group secured more than £290 million of potential contract revenues with little or no margin pressure and without having to go to tender, illustrating its terrific standing in the industry.
While no business is immune to the effects of the wider economy, Morson offers investors robust and almost recession-proof growth based on its unique positioning in technical staffing and the sheer diversity of the services it offers.
Valuation
Having suffered a sharp derating, it is fair to say that Morson, still something of a new kid on the block, is misunderstood by the stock market. Investors appear to have classified the company alongside companies with none of Morson’s visibility or exposure to sectors where continued demand looks assured.
Another message that appears to have been missed is that less than ten per cent of Morson’s net fee income arises from permanent placements – historically, companies skewed towards permanent placements suffer most during a downturn. In fact, rather than the recruitment sector, investors should really benchmark Morson against construction services and consultant engineers, with whom it shares the same growth drivers and which typically trade on price-to-earnings (p/e) ratios in the high teens and low twenties.
For the current year, Brewin Dolphin analyst Michael Vassallo, who has set a 240p target price for the shares, forecasts strong profits progression to £11.6 million and increased earnings of 17.9p (16.5p). Those metrics mean the shares are trading on a prospective earnings multiple of just eight times. For 2009, he envisages growth in profits to £12.4 million and earnings of 19.2p, estimates lowering the prospective p/e to 7.5. Based on envisaged dividends of 6p and 6.1p, the company also offers its backers a prospective yield of four per cent.
Overall, Morson’s miserly share price rating reflects a lack of awareness of the resilience of the business and its long-term growth prospects. The shares are a must for long-term investors in growth companies.
| AIM | £39.68m |
87.50p
|
-1.00p
|
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