Construction and engineering services company nmcn’s decision to reinstate dividends demonstrates, in our view, the Group’s confidence in prospects following a largely promising first half, which was disrupted by Covid and operational challenges on the completion of a major infrastructure scheme. We are reintroducing estimates that assume a return to revenue growth and margin recovery, fuelled by the PM’s pledge to “build, build, build” across several of nmcn’s core infrastructure and building sectors.
Group revenue slipped by 1.3% as a 3.7% Y/Y increase in the first quarter was reversed by the lockdown in Q2. PBT for the half dropped by 77%, in line with the trading update on 25 June, and impacted by site shut downs, productivity restrictions and under-recovery of overheads. Gross cash declined from £26m to £16m, following investments. The results reflected, in particular, further improvements in Telecommunications, offset by an anticipated hiatus in industry investment cycles in the Water segment and a challenging infrastructure project.
The majority of sites are now fully active and working at Covid-19 compliant production capacity. An almost unchanged order book represents c. 93% of the Group’s anticipated FY 2020E revenues and management anticipates a similar FY operating margin to the 0.6% in the first half (HY 2019, 2.4%). The Group points out that it serves key priority sectors for the Government, in particular Water, Roads and Telecommunications.
The Group has proposed a 10p interim dividend, reflecting performance in FY 2019, for which a final dividend was not paid due to initial cash-preservation response at the outset of the Covid crisis.
We have reintroduced forecasts for FY 2020E and FY 2021E, albeit highlighting the higher than normal uncertainty in the economic outlook. We believe we have erred on the side of caution, given the infrastructure pledges from Government, but nevertheless, our FY 2021E EPS estimate of 58.5p is approaching our previous forecast in March 2020 of 64.0p and the FY 2021E dividend estimate is 20p (previously 22p). We have not issued formal estimates for FY 2022E but speculate that earnings and dividends could benefit from further acceleration in revenue and further enhanced margins.