Morgan Sindall plc : Preliminary Results

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MORGAN SINDALL GROUP PLC

('Morgan Sindall' or 'the Group')

Preliminary results for the year ended 31 December 2012

Morgan Sindall Group plc, the construction and regeneration group, today announces its preliminary results for the year ended 31 December 2012.

	2012	2011		Change
Revenue	£2,047m	£2,227m		-8%
Profit before tax, amortisation and non-recurring items1	£47.1m	£45.3m		+4%
Profit before tax and amortisation	£37.1m	£43.9m		-15%
Profit before tax	£34.2m	£40.0m		-15%
Year end net cash	£50m	£109m		-54%
Average (net debt)/net funds balance2	(£40m)	£23m
Adjusted earnings per share3	79.3p	86.7p		-9%
Basic earnings per share	72.5p	77.5p		-6%
Total dividend per share	27.0p	42.0p		-36%
1  Non-recurring items comprise £10.0m of reorganisation costs in 2012 (2011: £1.4m of integration costs)
2  Average (net debt)/net funds is the average of the daily treasury balances for the year
3  Basic earnings per share before amortisation of intangible assets of £2.9m (2011: £3.9m)

Financial highlights

·       Solid performance in ongoing difficult markets and economy, in line with our expectations

·       Margin stable due to continued focus on delivering our strategy

·       Disposal of mature investments released £26m of capital to be redeployed into major housing and urban regeneration schemes

·       Result includes £7.0m gain on the disposal of medical properties investment

·       Restructuring of construction and affordable housing activities giving rise to non-recurring costs of £10.0m  

·       Average net debt balance of £40m (2011: net funds of £23m), as expected, reflecting increase in working capital deployed across the Group and reduction of construction-related revenue

·       Final proposed dividend of 15.0p (2011: 30.0p) giving a total dividend of 27.0p per share (2011:42.0p) to bring dividend cover back into the Group's target range

Strategic highlights

·       Continued to develop market-leading positions in sectors where we have a strong track record and can utilise our scale and expertise to deliver complex projects for our clients

·       Bidding selectively for quality projects and streamlined our business to match the expected medium-term workload  

·       Invested cash generated from our construction activities in regeneration schemes to secure greater returns over the medium term

·       Utilised strong relationships with clients to secure repeat business and positions on frameworks

·       Sale of mature investments to recycle capital into new projects

Board Changes

·       In November, Adrian Martin appointed as chairman with John Morgan returning to position of chief executive

·       David Mulligan stepping down as finance director at end of February 2013 to be succeeded by Steve Crummett, formerly finance director at Filtrona plc

Outlook

·       Sound forward order book of £3.1bn (2011: £3.4bn) with projects at preferred bidder of £0.5bn (2011: £0.3bn)

·       Growing regeneration pipeline of £2.1bn (2011: £1.8bn) with £0.4bn (2011: £0.6bn) of opportunities at preferred developer stage

·       Focus on growing infrastructure sectors in which we have a strong track record and where there are high barriers to entry

·       Expected public sector land release will drive regeneration in medium term

·       Market will remain challenging in short term due to delay in economic recovery

John Morgan,Chief Executive, commented:

'2012 has seen a solid performance in what has been a very tough market. The newly structured Board is focused on managing the business tightly to ensure we emerge from the downturn in a strong position to take advantage of the opportunities we believe lie ahead.  Our exposure to infrastructure continues to grow, and we see further opportunity to leverage our strong track record and gain market share. The momentum in our regeneration pipeline reinforces our confidence that returns from our investment will start to increase over the medium term and deliver superior returns.'

Divisional Highlights

* Operating profit is profit from operations before amortisation of intangible assets and non-recurring items.

Construction and Infrastructure

·      Operating profit* of £19.7m (2011: £21.1m)  on revenue of £1,168m (2011: £1,268m)

·      Steady margin of 1.7% (2011: 1.7%) due to rebalancing workload towards growth infrastructure sectors and construction sectors in which we have a strong track record

·      Continue with efficient management of overheads and careful contract selection

·      Strengthened leading reputation in the rail, highways, energy and water markets

·      Encouraging order book of £1.5bn (2011: £1.6bn) with projects at preferred bidder stage valued at £0.5bn (2011: £0.3bn)

Fit Out

·      Operating profit* of £11.3m (2011: £12.4m) on revenue of £427m (2011: £438m)

·      Slight reduction in margin to 2.6% (2011: 2.8%) due to competitive market

·      Maintained market-leading position

·      Progress in higher education sector and regional markets

·      Order book of £170m (2011: £216m) with the market forecast to improve in the medium term driven by an expected surge in lease events

Affordable Housing

·      Operating profit* decreased to £11.5m (2011: £18.5m) on revenue of £386m (2011: £462m) reflecting difficult market conditions in which new-build social housing has been particularly hard hit

·      Business restructured in response to pressure on margins, which decreased to 3.0% (2011: 4.0%)

·      Continued investment in growing portfolio of active mixed-tenure sites

·      Secured further social housing contracts in a challenging environment of Government spending cuts and increased initiatives to support private sales to first time buyers who are constrained by limited mortgage availability 

·      £110m response maintenance opportunities secured in the year

·      Order book down slightly at £1.3bn (2011: £1.5bn)

Urban Regeneration

·       Increased revenue to £62m (2011: £57m)

·       Operating profit* reduced to £2.7m (2011: £3.9m) due to the subdued market conditions as well as the increased share of costs of ISIS Waterside Regeneration joint venture, which will drive returns from 2014

·       Continued to identify new opportunities to work in long-term partnerships with private and public sector partners and secured £45m of Government funding to unlock stalled housing developments

·       Achieved significant milestones within the division's portfolio of schemes with planning applications over £300m secured in the year

·       Growing regeneration pipeline of £1.9bn (2011: £1.6bn), with a further £0.3bn (2011: £0.6bn) at preferred developer stage

Investments

·      Directors' portfolio valuation of £32m (2011: £49m)

·      Operating profit* of £7.4m (2011: loss of £3.9m) principally due to the £7.0m profit on disposal of mature medical properties investment and good performance from joint venture investments

·      Continued to identify and progress opportunities for other divisions, utilising the Group's integrated capabilities in design and construction

·      Looking ahead, significant opportunities to utilise the division's specialist skills to help its public sector partners overcome ongoing constraints on the public purse and realise economic potential from under-utilised assets

ENQUIRIES:
Morgan Sindall Group plc	Tel: [phone]
John Morgan, Chief Executive
David Mulligan, Finance Director
Brunswick	Tel: [phone]
Alison Kay/Nick Cosgrove

Morgan Sindall Group will hold its preliminary results presentation for analysts and institutional investors at 9.30am on 19 February 2013 at Numis Securities Limited, The London Stock Exchange Building,10 Paternoster Square, London EC4M 7LT. A copy of the presentation and an audio webcast will be available from 12.00pm atwww.corporate.morgansindall.com/investors.

This preliminary announcement and other information about Morgan Sindall Group plc are available on its website www.corporate.morgansindall.com/investorsvia the link to the corporate site.

CHAIRMAN'S STATEMENT

I am pleased to present my first statement as chairman of Morgan Sindall Group plc, having previously served on the Board as senior independent director.

Against the background of economic conditions which, over the past four years, have led to our UK construction markets declining by around a quarter, I am encouraged by the solid performance we have achieved in 2012.

Our clients are facing their own challenges and are placing a greater emphasis on capital cost, speed of delivery, quality and safety. Across the Group we are responding by identifying and achieving cost-effective solutions whilst continually raising the bar on the service we provide. 

Strategy

Our strategy remains the same:

·          Increasing our focus on the UK construction and regeneration market, choosing those segments where we can achieve a market-leading position

·          Targeting markets that offer the best potential for growth and provide medium- to longer-term opportunities with superior returns

·          Utilising the cash generated across our construction-related activities to invest in, and grow, our two regeneration-related divisions, Affordable Housing and Urban Regeneration.

As part of our ongoing objective to manage the impact on the Group of the industry downturn, we are constantly working to shape the business to fit the trading environment.  We have maintained a tight control on overheads and costs; we have recently reorganised our construction and affordable housing capabilities; we have changed the Board structure to improve efficiency and we are focussing on greater co-ordination across all divisions.

Dividend

The Board is proposing a final dividend of 15.0p (2011: 30.0p) giving a total dividend for the year of 27.0p (2011: 42.0p).  This change to the dividend will bring it back into line with our stated policy of covering the dividend by adjusted earnings by between 2.5 and 3 times.  We have been operating below this level of dividend cover for a number of years and the Board has now decided that it is appropriate to realign the dividend with this policy.

Board changes

There have been a number of changes to the Board over the past year.

In November the Board asked John Morgan, founder and former executive chairman, to return to the position of chief executive following the resignation of Paul Smith.  In this role, John is already bringing his extensive knowledge of the Group and our clients to drive increased collaboration across the Group and to develop new and emerging opportunities for our business. 

As announced in January 2013, David Mulligan is stepping down from his position of finance director at the end of February and will leave the Group in April.  We are delighted to have secured the services of Steve Crummett as the Group's new finance director. Formerly finance director at Filtrona plc, Steve's wide-ranging skills will be of considerable value to the Board and the Group.

I am pleased that Liz Peace, chief executive of the British Property Federation, agreed to join the Board as a non-executive director in November.  Her public sector background and understanding of the UK property industry will further strengthen the expertise of our Board.

I would like to take this opportunity to thank Paul and David for their commitment and valuable contribution to the Group over the past 10 and 15 years respectively.  We wish them well with their future plans.

Our people

I would like to thank our dedicated employees and capable teams who continue to strive for and achieve a high level of service for our partners and clients. Their enthusiasm and commitment through another difficult year for the industry and at a time of significant change for the Group is very much appreciated.

Looking forward

I am sure we are not alone in expecting 2013 to be another difficult year for the construction and regeneration market. Whilst we remain cautious over the outlook in the short term, the medium term prospects for the Group are improving with the key projects we have already secured and some early signs of further opportunities from 2014.

We see further medium-term potential driven by the Government's pledge to improve the UK's infrastructure, an increasing number of lease renewals, a number of large-scale, housing regeneration schemes and a stream of response maintenance opportunities, where demand has been resilient. In addition, any modest improvement in the economy will also help regeneration more broadly. This potential along with a sound forward order book of £3.1bn means that we believe the Group is well-positioned to emerge from the downturn in a stronger place.

I look forward to working with the Board in the next phase of the Group's development as we seize the exciting opportunities that lie ahead of us.

CHIEF EXECUTIVE'S REVIEW

I am delighted to return to the position of chief executive.  As a founder of the business I have steered the Group through prosperous years and through downturns and I intend to draw on this experience to lead the Group through the current challenging market conditions and ensure we are positioned to take advantage of the opportunities that lie ahead.  We have made progress in 2012 but there is always scope for improvement.

I believe our strategy is robust and our aim is to remain focused on those UK markets where we can develop a leadership position.  My priorities are on improving margins, focusing on our strengths in delivering complex projects, appropriate capital allocation, driving increased collaboration across the Group and developing new and emerging opportunities. 

I am fortunate in the broad base of expertise I can call upon within the Board and senior management.  There are undoubtedly some very exciting opportunities ahead for the Group and I am looking forward to ensuring we are in the best shape to leverage our expertise and track record.

Managing market conditions

	2012	2011	Change
Revenue £m	2,047	2,227	-8%
Profit before tax, amortisation and non-recurring items £m	47.1	45.3	+4%
Profit before tax and amortisation £m	37.1	43.9	-15%
Profit before tax £m	34.2	40.0	-15%

The Group has made steady progress throughout 2012 despite market conditions remaining tough.  Revenue fell to £2.0bn (2011: £2.2bn) and profit before tax and amortisation reduced to £37.1m (2011: £43.9m).  A £10.0m charge for reorganisation costs has been incurred during the year as we refocused our construction and affordable housing activities and these are shown as non-recurring items.  Profit before tax, amortisation and non-recurring items was £47.1m (2011: £45.3m), which includes a £7.0m gain on the disposal of our medical properties investment in July 2012.

Adjusted earnings per share before amortisation of intangible assets were 79.3p (2011: 86.7p).  The Group's construction-related revenue fell in 2012, which led to an increase in working capital.  This, coupled with a modest increase in the level of investment in our regeneration businesses, meant that average net debt was, as expected, £40m (2011: £23m average net cash).  The year end cash balance was £50.4m (2011: £108.9m).

We continue to face challenges including reductions in public spending, deferred investment decisions and higher levels of competition.  Rigorous risk management processes are in place to identify, monitor and, where possible, mitigate potential risks.  Our strategy remains to invest the cash generated from our construction-related activities in our regeneration-related activities, namely Affordable Housing and Urban Regeneration.  This strategy is being tested by a drop in construction revenues and tighter payment terms from clients.  We are therefore being more selective in the regeneration schemes we invest in and are identifying construction opportunities that best suit our market knowledge and specialist skills.  This includes our exposure to growth infrastructure markets where we already have a proven track record.  

We are positioning the Group to come out of the downturn stronger by realigning resources.  We have re-shaped the construction business within the Construction and Infrastructure division as we have become increasingly selective in our contract bidding.  We are also focused on growing its infrastructure business where there are market opportunities.  In non-infrastructure sectors, including the education and commercial sectors, we are increasing our focus on long-term frameworks.  Changes have also been made to the Affordable Housing division to improve its operational efficiency and to match the level of resources with its current and medium-term workload.   

Growing market share in infrastructure

We have increased our focus on growth sectors of the infrastructure market, in particular the energy and transport markets, which offer longer-term opportunities and enhanced returns due to the complexity and scale of projects.   Our reputation within these markets is improving significantly as we have established the required track record, scale and expertise.  We are increasingly working on larger infrastructure projects as our integrated approach enables us to reduce complexity for our clients. We are also enhancing our ability to deliver more complex projects through joint ventures as demonstrated by our appointment, in joint venture, by Sellafield Ltd as its delivery partner for a potential 15-year, £1.1bn contract. 

Unlocking land values for regeneration partners

Our growing investment in regeneration is closely aligned with the Government's agenda to release under-utilised land assets to stimulate local economies and create jobs. This approach allows local authorities and landowners to unlock land values and create opportunities at no significant upfront cost to the public sector.  Land is often retained by our partners, allowing us to use our capital efficiently and avoid the risk of buying land on the open market.  Our growing expertise in complex Local Asset Backed Vehicles (LABVs), driven by public sector land release, has led to our Investments division being appointed as the preferred joint venture partner for Slough Borough Council's LABV.  This long-term joint venture is expected to deliver one of the country's most ambitious regeneration schemes, completing developments up to a total value of £1.0bn over a 15-year period.

There are high barriers to entry in regeneration as success lies in experience, expertise, commitment and trust. It is these credentials, which take years to develop, that have enabled our regeneration-related divisions to embed themselves deeply within this market.  This year our Urban Regeneration division has demonstrated its expertise by securing £45m of Government funding that will play a critical role in kick-starting seven projects for our clients.  As tightening fiscal constraints persist, our collaborative approach will remain in strong demand as local authorities continue to seek partners with a track record, financial strength and the ability to provide funding solutions to regenerate worn-down communities.

In 2012, we increased our interest in a key joint venture, ISIS Waterside Regeneration, from 25% to 50%, which will underpin medium-term growth and we are excited about the opportunities that this brings.  We anticipate returns from our investment in regeneration to drive growth from 2014 as Urban Regeneration increases the level of construction activity on site in 2013.

Honing our competitive advantage

The UK construction industry output is forecast to show a drop of 9% in 2012 and is forecast to contract further by around 5% in 2013.  With output shrinking, bidding is more aggressive and pressure on margins has increased.  We continue to carefully select the contracts we bid for, and maintain a tight control of resources.  We also continue to focus on the areas where we can secure competitive advantage and on improving what we offer to clients.  Our unique and differentiating approach is rooted in our philosophy of Perfect Delivery, which lies at the heart of our operations, driving us to achieve ever higher standards of quality.

The Group aims to develop competitive advantage through its integrated capabilities.  Increasingly, we are maximising our offering through packaging together our capabilities and providing clients with the added value of two or more of our specialist divisions working together.  We have strength in our breadth of capabilities and in our ability to integrate different skills to provide excellent service as demonstrated within South Northamptonshire Council's £38m Towcester Regeneration and Civic Accommodation project.  The Investments division will deliver the project in partnership with Affordable Housing, who will deliver the residential development and Construction and Infrastructure, who will build the commercial development.

Construction and Infrastructure

	2012	2011	Change
Revenue £m	1,168	1,268	-8%
Operating profit * £m	19.7	21.1	-7%
Margin %	1.7	1.7	-
Forward order book £bn	1.5	1.6	-6%

As expected, Construction and Infrastructure's revenue fell by 8% to £1,168m (2011: £1,268m) with a corresponding fall in operating profit to £19.7m (2011: £21.1m).  This was a creditable performance given the market pressures, with margin steady at 1.7% (2011: 1.7%).

Falling public sector, and weak private sector, demand will inevitably impact on construction volumes going forward.  However, in line with the Group's strategy, the division has successfully implemented a shift in the balance of its work as it increases its focus on the growing infrastructure markets.  This is significantly offsetting the anticipated drop in demand. and has enabled the division to largely maintain its order book despite the overall market decline.

Through the division's commitment to Perfect Delivery, it sets the highest standards of service and consistently delivers against them.  It innovates by bringing a fresh approach to challenging projects, driving down client costs in many different ways including identifying cutting edge building techniques or through its expertise in value engineering.  The division's project team working on the £136m joint venture to deliver the M62 managed motorway contract clearly demonstrated its expertise when it identified £48m of value engineering and efficiency savings for its client before work commenced.

Shaping the UK's infrastructure

The highly regulated energy market offers significant potential to the Group as the division has extensive experience and expertise in transmission and distribution and is broadening its capability in power generation. The division's reach into the nuclear sector has been extended with the award of the contract at Sellafield to provide a range of essential infrastructure asset services.  Our relationship with National Grid has deepened further with two awards in joint venture including a five-year contract extension to deliver major enhancements to the UK's electrical transmission infrastructure.

Within the rail market, significant ongoing work has been undertaken for Network Rail throughout the year as part of the Multi Asset Framework Agreement, which runs until 2014 and is expected to deliver £200m of work in joint venture.  In addition, the division has been awarded the £20m North Doncaster Chord project on the East Coast Main Line.  The aviation market has considerable barriers to entry as it demands the highest standards in technical expertise, consistent delivery, security and safety.  Nine of the UK's top 15 airports have benefited from the division's specialist skills this year and the market especially values its integrated design and construction approach to complex projects.  Major projects have been secured under existing frameworks at Gatwick and Heathrow airports including a £31m runway rehabilitation contract at Heathrow airport.

The division is well positioned within the highways market to benefit from the Government's continuing commitment to infrastructure investment. Allocated work from the Highways Agency frameworks is expected to start in 2013 and approval has been provided to commence work, in joint venture, on upgrading the A1 to motorway standard between Leeming and Barton.

Within the water market, the AMP5 framework agreement with Yorkshire Water Services has provided £76m of joint venture contracts to improve bathing water quality at both Scarborough and Bridlington, drawing on the division's tunnelling expertise, and to design and build a pioneering new energy scheme at the Esholt Waste Water treatment works.

Construction and Infrastructure is working for UK Power Networks on a £14m cable tunnel project between Whitechapel and Finsbury Market in order to strengthen London's electricity supplies. Work also continues in joint venture for Thames Water on east London's Lee Tunnel, the capital's deepest ever tunnel, and for Crossrail on projects including C510 Whitechapel and Liverpool Street Station Tunnels where the joint venture is now two years into the five-year, £235m contract.

Performing across a breadth of sectors

The division's construction profile remains high as it focuses on sectors where it can benefit from its respected track record.  In particular education remains an important market.  2012 saw the launch of the division's innovative standard designs for primary and secondary schools that are fully supported by funding options to ensure projects are financially viable. It has also been allocated a further £45m project to construct nine new primary schools over the next three years in the latest phase of South Lanarkshire Council's £150m Primary School Modernisation Programme.

Despite the commercial market remaining subdued, the division has enjoyed success.  It has been appointed to deliver the £70m Longbridge town centre development in Birmingham and has also successfully established a foothold in London including winning £55m of building and refurbishment contracts and completing a £65m commercial development for Legal and General Property.

Encouraging forward order book

With little improvement anticipated in economic and market conditions in the short term we do expect the division's revenue, operating profit and margin to reduce further in 2013.  However, we are encouraged by the division's forward order book standing at £1.5bn (2011: £1.6bn) with projects at preferred bidder stage valued at £0.5bn (2011: £0.3bn).  We are confident that the division's track record in infrastructure, its expertise in operating frameworks and its wide range of skills will continue to provide it with a level of resilience, as it continues to adapt to changing market conditions.

Fit Out

	2012	2011	Change
Revenue £m	427	438	-3%
Operating profit * £m	11.3	12.4	-9%
Margin %	2.6	2.8	-7%
Forward order book £m	170	216	-21%

Fit Out's revenue was marginally down on 2011 at £427m (2011: £438m) with operating profit at £11.3m (2011: £12.4m) and margin softening slightly to 2.6% (2011: 2.8%). The division has performed steadily given it is operating within a highly competitive and price sensitive market. The division's consistent delivery and quality is valued and has led to 40% of the division's workload comprising repeat business from valued clients. 

Maintaining its leadership position

The division has made a major contribution to the Group's strategy of creating leading positions in its chosen markets. It has maintained its leadership position in the commercial office market, increasing market share to 30% and has delivered the year's largest project in the fit out market for a global professional services firm.  The division has maintained its focus on the more resilient sub-£1m project market where it expects continued growth in 2013 whilst the market continues to be impacted by a significant shortage of major projects. The strong trend towards refurbishment plays to the division's strengths as specialists in the refurbishment of occupied buildings as demonstrated this year by the refurbishment of Freshfields Bruckhaus Deringer LLP's London office whilst under occupation. 

Broadening capabilities

In line with our strategy to broaden our capabilities in existing markets, our design and build fit out business, Morgan Lovell, has significantly strengthened its offering this year by establishing a new workplace consultancy team. Demand for this extended offering has been proven with work already secured with leading organisations including LinkedIn and SAS.

Progress in core markets

The division has made progress in its core growth markets of retail banking, higher education and leisure. Securing a further retail banking framework appointment means that the division is now working in partnership with three of the four largest UK banks.  In the leisure market, a major completion includes the fit out of the largest premium gym in London, owned by American operators, Equinox. Current major clients in higher education include Imperial College London where the division is drawing on the Group's integrated capability, leading a joint venture with Construction and Infrastructure.

Growing regional presence

The division has increased its balance of work outside of London and reported a solid regional performance, underpinned by a new office opening in Leeds. Projects include a 60,000 sq ft fit out of ITV's new office at MediaCity UK in Salford and the delivery of the UK's only Leadership Energy and Environmental Design ('LEED') Gold and Ska Silver (assessment for sustainable office fit out) accredited office building for AutoDesk in Farnham.  Major projects are also underway in Scotland for Hewlett Packard and Scottish Power.

Improving medium-term outlook

Moving into 2013, the division remains committed to realising its ambition to be the trusted property partner of choice and to reaching its target of securing 100% of its workload through recommendation. Its objectives include securing more work directly from existing clients and frameworks and winning work from international clients.  Its order book currently stands at £170m (2011: £216m) and we expect similar market conditions in 2013 to those experienced in 2012.  The market is expected to improve in the medium term, driven by an expected surge in lease expiries and new office development.

Affordable Housing

	2012	2011	Change
Revenue £m	386	462	-17%
Operating profit * £m	11.5	18.5	-38%
Margin %	3.0	4.0	-25%
Forward order book £bn	1.3	1.5	-13%

It has been a challenging year for Affordable Housing with revenue falling by 17% to £386m (2011: £462m) with operating profit down to £11.5m (2011: £18.5m) and margin at 3.0% (2011: 4.0%).  This reflects difficult market conditions with new-build social housing being particularly hard hit, as well as lower than normal returns from a small number of older mixed-tenure regeneration projects.

Consequently, we have re-structured the business in response to tough competition and continuing pressure on margins.  Open market house sales have improved and the division has continued to develop its market-leading response maintenance offering, providing local authorities and housing associations with a nationwide service. This investment has led to over £110m of contract awards this year and a far greater contribution to the division's overall performance.

Affordable Housing is responding to the demanding environment by focusing on securing major, long-term regeneration schemes and more work via framework agreements across all its operations.  As the UK's complete affordable housing solutions specialist, its track record and its ability to forge strong long-term relationships has enabled the division to capitalise on major opportunities.

Complex regeneration projects

The division is playing a key role in our strategy to focus on major regeneration opportunities. Its expertise allows it to take on highly complex, housing-led regeneration projects, either solely or working in collaboration with other Group divisions. In 2013 it starts construction of the £100m Castleward Urban Village regeneration development, through Compendium, its joint venture with Riverside Housing Association, eventually delivering 850 new homes.  It is working on major long-term projects with other Group divisions including the potential delivery of the first £105m tranche of housing within the £1bn Slough Borough Council LABV. Other Group regeneration collaborations include the £38m Towcester Regeneration and Civic Accommodation Project with the Investments division and the second phase of residential development at Northshore, Stockton-on-Tees with our Urban Regeneration division.

A slowdown in affordable housing starts has had a significant impact on the division's new-build social housing programme.  The new affordable housing regime introduced gave Registered Providers until the end of March 2015 to complete their programmes.  A number of clients are yet to commence their building programmes, which has resulted in a significant slowdown in the market.  However, those with grant funding are expected to deliver the targeted homes in time, so the division is anticipating an increase in activity over the next 18 months as projects commence on-site to meet this deadline.

Open market sales volumes improving

Despite the limited mortgage availability subduing the market, house sale volumes have improved throughout the year with completed sales totalling 383 in 2012 (2011: 332).  The division's reputation for consistent delivery of high-quality sustainable homes is enabling it to win significant contracts despite the increasingly competitive environment. The division is working on one of Scotland's largest, new-build council housing sites, delivering 150 council homes in a £12m scheme for West Lothian Council.  Further improvement in its pipeline of opportunities is expected next year as the division works with partners to commit funding allocations to meet the Homes and Communities Agency's deadline of March 2015.

Response and refurbishment markets

The response maintenance market remains steady, albeit competitive. A highlight has been the £50m repairs contract awarded by Accord Group, reinforcing the division's market-leading position. There is a growing number of opportunities in the South of England with the division currently bidding for over £200m of contracts to be awarded in early 2013.

In the planned refurbishment market, the division continues to support social landlords upgrading their ageing housing stock.  It has been appointed as one of two contractors to share equally the delivery of a £35m Decent Homes improvement programme in Leicestershire and has also begun work on the Vale of Glamorgan framework, providing a platform to progress further work in Wales.

National need for affordable housing

With a forward order book of £1.3bn (2011: £1.5bn), the division is well placed to continue helping partners and clients meet the UK's crucial need for high-quality affordable housing. It is also targeting major housing regeneration schemes, which will drive economic and social renewal and enable growth in the medium term.

Urban Regeneration

	2012	2011	Change
Revenue £m	62	57	+9%
Operating profit * £m	2.7	3.9	-31%
Regeneration pipeline £bn	1.9	1.6	+19%

Urban Regeneration saw a rise in the level of activity in 2012 with revenue increasing to £62m (2011: £57m). Operating profit was down to £2.7m (2011: £3.9m).  The operating profit was impacted by the subdued market conditions as well as an increased share of the costs of the ISIS Waterside Regeneration joint venture.  During the year the division increased its interest in ISIS from 25% to 50%.  In the short term the division will recognise a greater share of the operating costs but will enjoy 50% of the future profit as opportunities are developed in the medium term.

Overcoming barriers to success

Overall the division has made solid progress this year. The momentum it has built up across its portfolio of 35 schemes and the award of new development agreements are all significant factors in our confidence that returns from our investment in regeneration will start to increase in 2014.

Our confidence is further strengthened by the fact that the division has capitalised on its reputation and secured £45m of Government funding to unlock stalled housing development.  These funds will help kick-start seven projects within the division's portfolio and funding conditions include an accelerated timetable of delivery.  This will result in a number of residential elements within the division's mixed-use schemes being brought forward and delivered over the next two years.

Sentiment remains subdued

Investor and tenant sentiment remains stable but subdued as economic recovery continues to stall.  The lack of speculative development in the commercial office market together with tenants exercising lease breaks is expected to lead to an uplift in demand for new 'Grade A' accommodation.  The division believes it is in a good position to respond to this uplift due to its landholdings secured through development agreements.

New development agreements

In 2012, £340m of schemes were converted from preferred developer status into contracted agreements.  The division has entered into two development agreements with Basingstoke and Deane Borough Council to deliver its £200m regeneration project, developing in excess of 700,000 sq ft on council-owned land parcels.  The first planning application is targeted for mid-2013 with work on-site expected to commence later in the year. Stockport Council has also selected the division to deliver its £140m office quarter and the first phase of development is due to start on-site early 2013. Progress has also been made in finalising development agreements to deliver major mixed-use schemes in Warrington and Hucknall.

Planning secured

Planning consents for new development valued at over £300m have been secured in 2012. These include consent for the second phase of residential development at its Northshore development to deliver 76 residential units in partnership with our Affordable Housing division. Planning has been secured for a 60,000 sq ft 'Grade A' office building, pre-let to KPMG. This development is the first new-build office in Leeds city centre since 2006.  Approximately £95m of construction contracts have been awarded on sites this year.  Construction has started on the 1.1m sq ft, £220m mixed-use Talbot Gateway Central Business District scheme in partnership with Blackpool Council. Work is also underway on the large-scale £350m regeneration of Swindon town centre.

Tentative lettings market

Fragile occupier confidence has meant that the lettings market remains subdued. In addition to KPMG in Leeds, significant deals have been completed including leasing 140,000 sq ft in two major distribution centres at Eurocentral in Scotland and over 14,000 sq ft of 'Grade A' office space to Santander at No 4 St Paul's Square, Liverpool.

Completions include the new £20m civic offices in Doncaster, an element of the city's £300m Civic and Cultural Quarter.  The division has also delivered 271 new homes as part of the £180m, 680,000 sq ft Rathbone Market regeneration scheme in Canning Town, East London, working within the English Cities Fund partnership.  With the critical need for housing in the capital, the first phase of this new development has proved successful with only 21 units currently unreserved.

Maintaining momentum

Whilst market constraints will continue in the short term, an increased emphasis on residential, especially in the South, has served to further balance the division's mixed-use activity.  Through maintaining momentum across its portfolio, commencing 15 further development projects with an end value of £190m, the division has good visibility of how it will contribute to the Group's profitability in 2014 and beyond. Its forward development pipeline stands at £1.9bn (2011: £1.6bn) with a further £0.3bn (2011: £0.6bn) at preferred developer status.  The Group's strong balance sheet and the division's track record will enable it to identify and create new long-term partnership opportunities with the public and private sectors, enabling the division to continue unlocking land values and playing a leading role in regeneration.

Investments

	2012	2011	Change
Directors' portfolio valuation £m	32	49	-35%
Investments carrying value £m	18.2	23.2	-22%
Operating profit/(loss) * £m	7.4	(3.9)	n/a

Investments' mandate is to create valuable investments for the Group and to unlock prime long-term construction opportunities for other divisions. The division delivered a profit in 2012 of £7.4m (2011: operating loss of £3.9m).  This was driven, in particular, by the £7.0m profit from the £24m sale of the division's medical property investments and from a healthy performance from our investments portfolio during the year of £5.7m (2011: £1.6m).  The sale was in line with our strategy to realise investments as they mature to redeploy capital into new projects.

Creating opportunities for the Group

Investments has capitalised on its reputation and experience gained from the complex Bournemouth Town Centre LABV and has been appointed preferred partner by Slough Borough Council for its LABV joint venture.  The LABV will benefit from the strength of our integrated capability and will procure work from our Affordable Housing and Construction and Infrastructure divisions over the lifetime of the partnership.

The division has also been appointed preferred developer for South Northamptonshire Council's £38m Towcester Regeneration and Civic Accommodation Project and has secured planning consents for a residential development, student accommodation and a multi-storey car park in the 20-year £500m+ Bournemouth Council LABV scheme.

Scotland has an extensive public-private partnership-based investment programme and is therefore an area of strategic importance for the division. The Western Territory Hub Programme Board has recently selected an Investments-led joint venture, the WellSpring Partnership, to deliver a pipeline of £160m public sector health and education projects over the next ten years. The WellSpring Partnership will deliver new facilities for a number of public sector bodies in the Glasgow area. In East Scotland, the £95m Tayside Acute Adult Mental Health Development scheme has been completed through the Group's integrated capability with design and construction services provided by our Construction and Infrastructure division.

Positive pipeline of opportunities

The division has carried out a review of the changes to PFI announced in the Government's launch of its successor, PF2, in the Autumn Statement. Whilst clarification is being sought around how particular aspects of the announcement will work in practice, it is considered to be a positive development.  PF2 will be applied to the £2bn Priority Schools Building Programme expected to come to the market in spring 2013 and this is a major target for Investments as it hopes to leverage its track record within the education market and identify further opportunities for our Construction and Infrastructure division. It is anticipated that other Government departments will start to release a pipeline of schemes procured under this initiative later in the year, providing further opportunities for Investments and other Group divisions.

Whilst current economic conditions persist, local authorities will need support from the private sector. The division will continue to identify innovative ways to structure and finance deals to allow its partners to realise the potential of under-utilised property assets, secure efficiencies and promote economic growth and social well-being.  The division expects to realise further investments in 2013 in order to recycle capital to create revenue for the Group and provide a sustainable return on investment.

Sustainability

During 2012, we continued to embed our Roadmap for Sustainability and work towards merging the Group's procurement and sustainability functions to create a new team headed by the director of group sustainability and procurement.  This will take effect from February 2013.  The Group spends a significant amount through its supply chain each year and a closer alignment of the two functions will drive improvements in the Group's sustainability performance.  The Group achieved a significant reduction in its carbon emissions and increase in the tonnage of waste diverted from landfill during the year.  The Group's total commitment to ensuring that we offer a safe working environment for all employees is demonstrated by our health and safety performance.  This is the third consecutive year in which the Group achieved its aim of less than 100 reportable incidents.

Outlook

The market will remain challenging in the short term with little sign of improvement expected as economic recovery continues to be slow.  We will maintain our focus on careful contract selection, Perfect Delivery and tight management of overheads.

We have positioned the Group to capitalise on growth markets with barriers to entry and, in the longer term, the opportunity for superior returns.  We will continue to pursue opportunities in these markets, promoting the synergies created by our integrated capabilities.

Whilst cautious over the short term outlook, we are encouraged by the opportunities that exist in our chosen markets. With a sound forward order book of £3.1bn (2011: £3.4bn), with a further £0.5bn (2011: £0.3bn) at preferred bidder stage, and a regeneration pipeline of £2.1bn (2011: £1.8bn), we believe the Group is well positioned to maximise opportunities throughout the next year and beyond.

FINANCE REVIEW

Steady 2012 performance

		2012	2011
Revenue		£2,047m	£2,227m
Operating profit*		£48.1m	£46.1m
Profit before tax, amortisation and non-recurring items**		£47.1m	£45.3m
Profit before tax and amortisation		£37.1m	£45.3m
Profit before tax		£34.2m	£40.0m
Year end cash balance		£50m	£109m
Basic earnings per share adjusted for amortisation		79.3p	86.7p
Basic earnings per share		72.5p	77.5p
Dividend per share		27.0p	42.0p
*Operating profit has been calculated as profit from operations before amortisation and non-recurring items
**Non-recurring items comprise £10.0m of reorganisation costs in 2012 (2011: £1.4m of integration costs)

Overview

The challenging macro-economic conditions continued in 2012. This resulted in lower workload and margins in some of the markets in which the Group operates, such as construction and affordable housing. The Group has sought to mitigate this as far as possible by bidding selectively for high-quality schemes where there is opportunity for integrated working, focussing on growth sectors of the infrastructure market and maintaining tight control on the cost base. This has enabled the Group to deliver a solid set of results.

Revenue of £2,047m and operating profit* of £48.1m

Revenue declined by 8% to £2,047m (2011: £2,227m), primarily in the Construction and Infrastructure and Affordable Housing divisions.

Operating margins before amortisation and non-recurring items held firm in Construction and Infrastructure at 1.7% (2011: 1.7%) and declined slightly in Fit Out to 2.6% (2011: 2.8%). The reduction in margin in Affordable Housing to 3.0% (2011: 4.0%) was due to challenging market conditions and lower levels of profitability from some older regeneration schemes.

The Investment division completed two disposals during the year generating operating gains of £8.8m. These gains are considered to be recurring items as they are in accordance with the Group's strategy of disposing of its investments as they mature to enable capital to be recycled into new schemes.

The Group continues to manage its cost base resulting in a reduction in administrative expenses (excluding non-recurring items) of 10% to £153.7m (2011: £170.3m).

Overall, operating profit* increased to £48.1m (2011: £46.1m).

Non-recurring items

The Group streamlined the management structures in a number of divisions and has recognised a non-recurring restructuring cost of £10.0m. This comprises redundancy and property related costs and relates principally to the Construction and Infrastructure and Affordable Housing divisions. In 2011 non-recurring costs of £1.4m were incurred in relation to merging the Construction and Infrastructure divisions.

Tax

The Group's tax charge of £3.5m (2011: £7.2m) represents an effective tax rate of 12.3% (2011: 18.1%), significantly lower than the standard rate of corporation tax. The low effective tax rate arises primarily as a result of there being no expected tax liabilities upon the gains on disposals of investments during the year, together with the effect of revaluing the deferred tax liabilities to reflect the change in the statutory rate of corporation tax from 25% to 23%. After adjusting for these two items, the tax charge is approximately equal to tax at the UK corporation tax rate on profit before tax excluding joint venture profit, which is reported after tax.

Earnings per share

Adjusted basic earnings per share before amortisation has decreased by 9% from 86.7p to 79.3p, due to the decrease in profitability offset by the decrease in the effective tax rate. Basic earnings per share has fallen by 6% to 72.5p from 77.5p.

Cash and interest

The drop in construction revenues combined with clients requiring longer payment terms resulted in a lower cash balance at the year end of £50m (2011: £109m). The Group had average net debt during the year of £40m (2011: net cash £23m) principally due to an increase in working capital deployed across the Group. The net finance expense increased to £1.0m (2011: £0.8m).

Acquisitions and disposals

The Group disposed of its mature investments in its NHS LIFT and medical properties portfolio and the Dorset Fire & Rescue PFI for total consideration of £27.7m.

The Group increased its investment in the ISIS Waterside Regeneration strategic partnership from 25% to 50% for deferred consideration with a fair value of £18.5m payable between 2013 and 2017. In addition the Group purchased the remaining 50% share of Lewisham Gateway Developments from its joint venture partner for consideration of £0.4m. These schemes are expected to begin generating profits in 2014.   

Capital management

The Board maintains a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the Group. There were no changes in the Group's approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.

The Group is financed by equity, with committed banking facilities available to draw on to fund shorter-term movements in working capital. The Group is not particularly capital intensive, hence investment in fixed assets is relatively low. The Group invests cash generated by its construction activities in long-term regeneration projects which themselves can lead to construction opportunities for the Group. Some of these regeneration projects will be carried out in joint venture and will be funded in part by Group resources but will largely draw on non-recourse debt finance. The Group has a small defined benefit pension plan (£1.5m deficit on £10.4m of gross liabilities) that is closed to new members and further accruals.

Banking facilities committed until 2015

The Group has £110m of committed banking facilities through to September 2015. The banking facilities are subject to financial covenants, all of which have been met throughout the year. These committed facilities supplement cash balances in providing financial security to the Group.

Dividend

The Board recommends a final dividend of 15.0p payable on 24 May 2013 to shareholders on the register at the close of business on 3 May 2013. This will give a total dividend for the year of 27.0p (2011: 42.0p).

The Group has a long-term progressive dividend policy and aims to achieve dividend cover based on adjusted earnings of between 2.5 and 3.0 times. In recent years the Group has maintained the dividend despite a reduction in earnings such that dividend cover has been below its target range for several years. The Board has now determined that it is appropriate to reduce the dividend in 2012 such that dividend cover increases to 2.9 times (2011: 2.0 times), which is within its target range.

Consistent approach to treasury risk management

The Group has clear treasury policies which set out approved counterparties and determine the maximum period of borrowings and deposits. Deposits are restricted to periods of no longer than three months. The Group has very limited exposure to foreign exchange risk because its operations are based almost entirely in the UK, but committed foreign exchange exposures are hedged as and when they arise.

Some of the Group's joint ventures use interest rate swaps to hedge floating interest rate exposures and Retail Prices Index swaps to hedge inflation exposure. The Group considers that its exposure to interest rate, foreign exchange and inflation movements is appropriately managed.

In the normal course of its business, the Group arranges for financial institutions to provide client guarantees ('bonds') to provide some financial protection in the event that a contractor fails to meet its commitments under the terms of a contract. The Group pays a fee and provides a counter-indemnity to the financial institutions for issuing the bonds. As at 31 December 2012, contract bonds in issue under uncommitted facilities covered £186.5m (2011: £204.1m) of contract commitments of the Group.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in this business review. The financial position of the Group, its capital management policy, its cash flows, liquidity position and borrowing facilities are also described above.

As at 31 December 2012, the Group had cash of £50.4m and committed banking facilities of £110m extending to September 2015.

The directors have reviewed the Group's forecasts and projections, which show that the Group will have a sufficient level of headroom within facility limits and covenants for the foreseeable future.

After making enquiries the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the annual financial statements.

RISK REVIEW

The Group's strategy is to achieve leading positions in its chosen markets and to use the cash generated from those construction activities to invest in housing-led and mixed-use regeneration to generate higher levels of return.

A risk management framework has been put in place to identify risks to the Group achieving its goals and to document controls to manage and mitigate these risks. Risk registers document these risks and controls at different levels within the organisation; Group, division and project. The Group and divisional risk registers are reviewed and updated at least every six months to ensure that risks are properly evaluated and that controls remain appropriate. Project risks are reviewed and updated on an ongoing basis. The internal audit function reviews the control environment to ensure that each of the risks and controls identified are tested at least every two years, which cover both project and corporate level risks.

It is the role of the Group's audit committee to monitor and approve the work undertaken by the internal audit function and to ensure that the internal audit process remains efficient and effective. This monitoring process has been strengthened by divisional audit committees established separately for Construction and Infrastructure and Affordable Housing, which have larger and more complex operations than other divisions.

The control environment is underpinned by a clear set of delegated authorities that define processes and procedures for approving key decisions, particularly with regard to project pre-qualifications, tender pricing and bid submissions. This ensures that projects are approved at the appropriate level of management, with the largest and most complex projects being approved at Board level.

The Board has identified the following key risks to the Group achieving its strategic goals, aligned to the different elements of the Group's business model.

Risk category	Description and impacts	Mitigation
Markets The markets in which the Group operates are affected to varying degrees by general macro-economic conditions. The Group is particularly focused at present on managing the impact of the challenging economic conditions, changes in Government spending priorities and the increasing emphasis on infrastructure investment.	New opportunities Shortage of new opportunities caused by a challenging economic environment, austerity measures reducing public spending and reduced or delayed Government funding schemes. Fall in construction activity may result in less cash being generated which will reduce the capital available to invest in regeneration and growth markets.	·   Market spread and diversification offer a degree of protection against decline in individual markets ·   Scale also gives some protection by enabling the Group to compete and work in areas with higher barriers to entry ·   Regular monitoring and reporting of financial performance, work won, prospects and pipeline of opportunities
	Overcapacity in market This leads to price competition and more onerous terms and conditions being sought by clients. This can also affect the bidding process where an increased number of pre-conditions may be put in place by clients through the bidding phase. Increased price competition leads to downward pressure on margins and an increased risk profile if onerous terms and conditions are accepted. Ultimately overheads may not be covered by declining gross margins.	·   Delegated authorities in place require approval of tenders by appropriate levels of management, covering both price and terms and conditions ·   Delegated authorities stop the business knowingly taking on loss making contracts. ·   Through the development of effective client relationships, the Group seeks to differentiate itself through the quality of its service and consistency of delivery ·   Greater value can be offered to clients when, where appropriate, different divisions work together ·   Regular review of resource levels against anticipated workload
Strategy The Group's strategy needs to be clearly articulated and understood to ensure successful outcomes are achieved.	Conflicted decision making The Group's strategy is not clearly communicated to and understood by employees. Employees may unintentionally make decisions that are not wholly aligned with the Group's strategic aims.	·   Strategic aims of the Group, individual divisions and business units are communicated, as appropriate, in business cascades or in annual employee reviews that seek to align personal and corporate objectives ·   Delegated authorities ensure that material decisions are signed off at an appropriate level, ensuring that the decisions made are in accordance with the Group's strategy ·   Monthly divisional review meetings allow the Board to assess progress against the agreed strategy

Risk category	Description and impacts	Mitigation
Capable teams The Group's health, safety and environmental (HSE) performance and business conduct affects employees, sub-contractors and the public and, in turn, can affect its reputation and commercial performance. In a challenging economic climate, it can become increasingly difficult to retain key employees, especially those targeted by competitors.	Environmental or safety incident An accident or incident causes harm to a community or to an individual, leading to the potential for legal proceedings, financial penalties, reputational damage and delays to a client's project. Consequently the Group fails to pre-qualify for contracts due to a poor health, safety and environmental track record.	·   Key executives with specific responsibility for HSE are identified in each division and on the Board ·   HSE policy frameworks are communicated and senior managers appointed to manage them in each division and at project level where appropriate ·   Established safety systems, site visits, monitoring and reporting, including near miss and potential hazard reporting, are in place across the Group ·   Investigation and root cause analysis of accidents or incidents and near misses ·   Regular HSE training and updates including behavioural training ·   Major incident management plans and business continuity plans in place that are periodically reviewed and tested
	Failing to attract talented people Risk that the Group fails to adapt by not ensuring that the best people are employed to create the most capable teams possible. The Group does not benefit from new ideas and experience and could become too internally focused without sufficient external stimulus to challenge current thinking and promote positive change.	·   Progression planning in place in each division to ensure immediate and future replacements are identified and developed accordingly ·   Investment made in graduate, trainee and apprenticeship schemes to secure an annual inflow of new talent ·   Monitoring of future skills and capability requirements ·   Identification of future talent

	Not developing or retaining capable teams The business is not able to keep hold of employees or improve the performance of the teams that they work within. Without capable teams, it becomes very difficult to maintain the high levels of customer service that the Group strives for. When employee turnover increases it can adversely affect morale within the rest of the team.	·   Annual employee appraisal process in place, providing two way feedback on performance ·   Training and development plans seek to maximise relevant skills and experience Remuneration packages are benchmarked where possible
	Poor project delivery The quality of workmanship or poor commercial and operational delivery of a contract, whether by the Group or a joint venture partner, does not meet expectations of clients. Interim cash payments may be withheld impacting working capital and issues may also impact contract profitability and corporate reputation.	·   Strategic trading arrangements in place with key suppliers and subcontractors to help ensure consistent quality ·   Collation and review of client feedback ·   Lessons learned exercises carried out on projects ·   Employees incentivised on basis of contract performance ·   Internal peer reviews

Risk category	Description and impacts	Mitigation
Select right opportunities The Group undertakes several hundred contracts each year and it is important that contractual terms reflect risks arising from the nature and complexity of the works and the duration of the contract.	Misprice contract When pricing a contract the planned works are not costed correctly, increased commodity prices are not factored in or risk is not properly evaluated, leading to a contract being mispriced. Leads to loss of profitability on a contract and reduces overall gross margin.	·   System of delegated authorities governs tenders and the acceptance of work ·   A contract tender is reviewed at three key stages: pre-qualification, pre-tender and final tender submission ·   Contract tender approved by the appropriate level of management
	Managing changes to contracts and contract disputes As contracts progress there are inevitably changes to the works being delivered and a risk exists that the Group does not get properly reimbursed for the cost of the changes as a result of disagreement, poor commercial controls or disputes. Leads to costs being incurred that are not recovered and loss of profitability on a contract. Ultimately the Group may need to resort to legal action to resolve disputes which can prove costly, and the outcomes can be uncertain.	·   Work carried out under standard terms wherever possible ·   Well established systems of measuring and reporting project progress and estimated outturns, including any contract variations ·   Contract terms reviewed at tender stage and any variations approved by the appropriate level of management ·   Reviews in place to ensure rigour is applied in core processes ·   Decision to take legal action based on appropriate legal advice ·   Suitable provision made for legal costs
	Poor contract selection Risk that the Group accepts a contract outside of its core competencies or for which it has insufficient resources. This can become a greater risk when there is a shortage of opportunities in the market. This may lead to poor understanding of project risks, poor project delivery and ultimately result in contract losses and reputational damage.	·   Business planning identifies markets and clients that the Group will target ·   System of delegated authorities governs tenders and the acceptance of work ·   Plans for specific types of work and contract size agreed by individual business unit

Risk category	Description and impacts		Mitigation
Distinctive approach The Group has a unique and differentiating approach. If employees are not properly engaged with the culture of the business, clients are less likely to receive exceptional levels of service.		Perfect Delivery The Group does not fully adopt the philosophy of Perfect Delivery. Likely to incur additional costs that erode profit margins. It is also likely that client experiences will fall short of the standards set by the Group, potentially leading to a reduction in repeat business or in referrals from client recommendations.		·   Continuing engagement with employees, clients and supply chain ·   Internal resources dedicated to the further development of Perfect Delivery, ensuring maximum engagement
		Business conduct Failure by employees to observe the appropriate standards of integrity and conduct in dealing with clients, suppliers and other stakeholders. This is an increased risk in times of economic uncertainty and hardship. Could expose the Group to significant potential liability and reputational damage that results in it failing to pre-qualify for contracts.		·   Independent 'Raising Concerns' phone line available for all employees ·   Audit committee reviews incidents log from the Raising Concerns phone line which includes the outcome of investigations into such incidents and any follow up actions ·   Ethics policy communicated to all employees ·   Training in place to ensure awareness of and compliance with both competition law and the Bribery Act ·   Reviews and risk assessments undertaken to ensure adequate procedures are in place and followed
		Innovation Failure to adopt appropriate innovations in new products or techniques. The Group becomes less effective than its competitors and not able to secure best value for, or offer the best solutions to, its clients.		·   Reviews undertaken to promote elimination of waste of both resources and process, adopting lean methodology where appropriate ·   Building Information Modelling strategy developed to provide more efficient asset management across the whole life cycle ·   Maintaining knowledge base of new products and thinking

Risk category	Description and impacts		Mitigation
Successful outcomes The terms on which the Group trades with counterparties affect its liquidity. Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern.		Insolvency of key client, sub-contractor or supplier Risk that insufficient credit checks and due diligence is not undertaken and that a key client, sub-contractor or supplier becomes insolvent. There is also a risk that, given the wider macro-economic climate, historical credit checks are relied upon that have subsequently been overtaken by events. Insolvency of a client may result in significant financial loss due to a bad debt. Insolvency of a sub-contractor or supplier may disrupt a contract's programme of work and lead to increased costs in finding replacements for their services.		·   Work only carried out for financially sound clients, established through credit checks ·   Specific commercial terms, including payment terms, with escrow accounts used as appropriate ·   Seek and obtain financial security where required ·   Work with approved suppliers wherever possible ·   Contracts with clients, sub-contractors or suppliers only entered into after review at the appropriate level of delegated authority ·   Regular meetings with key supply chain members to give and receive feedback and maintain the quality of the relationship
		Management of working capital Risk that poor management of working capital leads to inadequate liquidity and funding problems. The lack of liquidity impacts the Group's ability to continue to trade or restricts its ability to invest in regeneration schemes or growth markets.		·   Daily monitoring of cash levels and regular forecasting of future cash balances ·   Regular stress testing of long-term cash forecasts ·   Regular assessment of the level of banking facilities available to the Group ·   Working capital monitored and managed as appropriate, with acute focus on any overdue work in progress, debtors or retentions ·   For very significant purchases on large projects, forward orders can be placed on a longer timescale
		Management of overheads The Group fails to responsibly shape the business and becomes uncompetitive. If the cost base is too high, the Group may be hindered in winning new work and profit margins will be eroded.		·   Overheads are reviewed on a monthly basis ·   Business planning identifies future overhead requirements Internal and external benchmarking is carried out to ensure overhead levels are appropriate

Consolidated income statement

For the year ended 31 December 2012               

			2012	2011
		Notes	£m	£m
Continuing operations
Revenue		5	2,047.1	2,226.6
Cost of sales			(1,860.4)	(2,010.9)
Gross profit			186.7	215.7
Amortisation of intangible assets		5	(2.9)	(3.9)
Non-recurring items		5	(10.0)	(1.4)
Other administrative expenses			(153.7)	(170.3)
Total administrative expenses			(166.6)	(175.6)
Share of net profit of equity accounted joint ventures		5	5.7	0.3
Other gains and losses			9.4	0.4
Profit from operations		5	35.2	40.8
Finance income			2.3	1.6
Finance costs			(3.3)	(2.4)
Net finance expense			(1.0)	(0.8)
Profit before income tax expense		5	34.2	40.0
Income tax expense		6	(3.5)	(7.2)
Profit for the year			30.7	32.8
Attributable to:
Owners of the Company			30.8	32.9
Non-controlling interests			(0.1)	(0.1)
			30.7	32.8
Earnings per share
From continuing operations
Basic		8	72.5p	77.5p
Diluted		8	72.0p	76.5p

There were no discontinued operations in either the current or comparative years.

Consolidated statement of comprehensive income

For the year ended 31 December 2012

	2012	2011
	£m	£m
Profit for the year	30.7	32.8
Other comprehensive income/(expense):
Actuarial loss arising on defined benefit obligation	(0.8)	-
Deferred tax on defined benefit obligation	0.1	(0.1)
Movement on cash flow hedges in equity accounted joint ventures	(0.4)	(0.7)
Reclassification adjustments for loss on cash flow hedges included in profit	2.1	-
Other movement on cash flow hedges	-	(0.2)
Other comprehensive income/(expense) for the year, net of income tax	1.0	(1.0)
Total comprehensive income for the year	31.7	31.8
Attributable to:
Owners of the Company	31.8	31.9
Non-controlling interests	(0.1)	(0.1)
	31.7	31.8

Consolidated balance sheet

At 31 December 2012

		2012	2011
	Notes	£m	£m
Non-current assets
Goodwill		213.9	214.1
Other intangible assets		9.3	12.5
Property, plant and equipment		20.1	21.6
Investment property		11.3	11.1
Investments in equity accounted joint ventures	11	62.2	49.8
Investments		0.4	0.4
Shared equity loan receivables		19.2	17.6
		336.4	327.1
Current assets
Inventories		159.4	146.0
Amounts due from construction contract customers		217.3	228.6
Trade and other receivables		187.6	186.5
Cash and cash equivalents		50.4	108.9
		614.7	670.0
Total assets		951.1	997.1
Current liabilities
Trade and other payables		(572.1)	(620.9)
Amounts due to construction contract customers		(47.4)	(78.8)
Current tax liabilities		(5.2)	(8.7)
Finance lease liabilities		(1.2)	(0.8)
Provisions		(3.0)	(4.6)
		(628.9)	(713.8)
Net current liabilities		(14.2)	(43.8)
Non-current liabilities
Trade and other payables		(22.9)	(0.3)
Finance lease liabilities		(5.0)	(4.3)
Retirement benefit obligation		(1.5)	(1.3)
Deferred tax liabilities		(19.0)	(19.8)
Provisions		(24.5)	(22.0)
		(72.9)	(47.7)
Total liabilities		(701.8)	(761.5)
Net assets		249.3	235.6
Equity
Share capital		2.2	2.2
Share premium account		26.7	26.7
Capital redemption reserve		0.6	0.6
Own shares		(5.6)	(5.8)
Hedging reserve		(2.3)	(4.0)
Retained earnings		228.1	216.2
Equity attributable to owners of the Company		249.7	235.9
Non-controlling interests		(0.4)	(0.3)
Total equity		249.3	235.6

Consolidated cash flow statement

For the year ended 31 December 2012

		2012	2011
		£m	£m
Profit from operations for the year		35.2	40.8
Adjusted for:
Amortisation of fixed life intangible assets		2.9	3.9
Share of net profit of equity accounted joint ventures		(5.7)	(0.3)
Depreciation of property, plant and equipment		6.5	9.5
Expense in respect of share options		0.2	0.5
Defined benefit obligation payment		(0.7)	(0.7)
Defined benefit obligation charge		0.1	0.1
Gain on disposal of interests in joint ventures		(8.8)	-
Gain on disposal of property, plant and equipment		(0.6)	(1.0)
Revaluation of investment properties		0.5	0.2
Movement in fair value of shared equity loan receivables		(0.2)	0.9
Operating cash flows before movements in working capital		29.4	53.9
Net increase in investment properties		(0.7)	(7.0)
Increase in shared equity loan receivables		(1.5)	(4.9)
Redemptions of shared equity		0.1	0.3
Increase in inventories		(10.9)	(3.2)
Decrease/(increase) in receivables		10.8	(7.5)
Increase in non-current provisions		2.5	6.6
Decrease in payables and short-term provisions		(78.4)	(41.2)
Movements in working capital		(78.1)	(56.9)
Cash utilised in operations		(48.7)	(3.0)
Income taxes paid		(8.1)	(6.8)
Interest paid		(3.0)	(2.0)
Net cash outflow from operating activities		(59.8)	(11.8)

Cash flows from investing activities
Interest received		2.2	1.4
Dividend from joint ventures		1.3	0.3
Proceeds on disposal of property, plant and equipment		1.6	4.6
Purchases of property, plant and equipment		(4.0)	(5.4)
Net payments to acquire or increase interests in joint ventures		(7.0)	(6.3)
Proceeds on disposal of interests in joint ventures		26.2	-
Payments for the acquisition of subsidiaries and other businesses		(0.1)	(0.4)
Net cash inflow/(outflow) from investing activities		20.2	(5.8)
Cash flows from financing activities
Dividends paid		(17.8)	(17.8)
Repayments of obligations under finance leases		(1.1)	(4.3)
Net cash outflow from financing activities		(18.9)	(22.1)
Net decrease in cash and cash equivalents		(58.5)	(39.7)
Cash and cash equivalents at the beginning of the year		108.9	148.6
Cash and cash equivalents at the end of the year
Bank balances and cash		50.4	108.9

Consolidated statement of changes in equity

For the year ended 31 December 2012

	Attributable to owners of the Company
	Share capital	Share premium account	Capital redemption reserve	Reserve for own shares held	Hedging reserve	Retained earnings	Total	Non-controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2012	2.2	26.7	0.6	(5.8)	(4.0)	216.2	235.9	(0.3)	235.6
Total comprehensive income for the year:
Net profit	-	-	-	-	-	30.8	30.8	(0.1)	30.7
Actuarial loss arising on defined benefit obligation	-	-	-	-	-	(0.8)	(0.8)	-	(0.8)
Deferred tax on defined benefit obligation	-	-	-	-	-	0.1	0.1	-	0.1
Movement on cash flow hedges in equity accounted joint ventures	-	-	-	-	(0.4)	-	(0.4)	-	(0.4)
Reclassification adjustments for gains included in profit	-	-	-	-	2.1	-	2.1	-	2.1
Total comprehensive income for the year, net of income tax	-	-	-	-	1.7	30.1	31.8	(0.1)	31.7
Share-based payments	-	-	-	-	-	0.2	0.2	-	0.2
Exercise of share options	-	-	-	0.2	-	(0.2)	-	-	-
Movement on deferred tax asset on share-based payments	-	-	-	-	-	(0.4)	(0.4)	-	(0.4)
Dividends paid:
Final dividend for 2011	-	-	-	-	-	(12.7)	(12.7)	-	(12.7)
Interim dividend for 2012	-	-	-	-	-	(5.1)	(5.1)	-	(5.1)
Balance at 31 December 2012	2.2	26.7	0.6	(5.6)	(2.3)	228.1	249.7	(0.4)	249.3

Consolidated statement of changes in equity

For the year ended 31 December 2011

	Attributable to owners of the Company
	Share capital	Share premium account	Capital redemption reserve	Reserve for own shares held	Hedging reserve	Retained earnings	Total	Non-controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2011	2.2	26.7	0.6	(5.9)	(3.1)	201.4	221.9	(0.2)	221.7
Total comprehensive income for the year:
Net profit	-	-	-	-	-	32.9	32.9	(0.1)	32.8
Other comprehensive income:
Deferred tax on defined benefit obligation	-	-	-	-	-	(0.1)	(0.1)	-	(0.1)
Movement on cash flow hedges in equity accounted joint ventures	-	-	-	-	(0.7)	-	(0.7)	-	(0.7)
Other movement on cash flow hedges	-	-	-	-	(0.2)	-	(0.2)	-	(0.2)
Total comprehensive income for the year, net of income tax	-	-	-	-	(0.9)	32.8	31.9	(0.1)	31.8
Share-based payments	-	-	-	-	-	0.5	0.5	-	0.5
Exercise of share options	-	-	-	0.1	-	(0.1)	-	-	-
Movement on deferred tax asset on share-based payments	-	-	-	-	-	(0.6)	(0.6)	-	(0.6)
Dividends paid:
Second interim dividend for 2010	-	-	-	-	-	(12.7)	(12.7)	-	(12.7)
Interim dividend for 2011	-	-	-	-	-	(5.1)	(5.1)	-	(5.1)
Balance at 31 December 2011	2.2	26.7	0.6	(5.8)	(4.0)	216.2	235.9	(0.3)	235.6

Share premium account

The share premium account represents the difference between the fair value of consideration received and the nominal value of the shares issued.

Capital redemption reserve

The capital redemption reserve was created on the redemption of preference shares in 2003.

Reserve for own shares held

The shares are held as 'treasury shares' and represent the cost to Morgan Sindall Group plc of shares purchased in the market and held by the Morgan Sindall Employee Benefit Trust (the 'Trust') to satisfy options under the Group's share incentive schemes.

The number of shares held by the Trust at 31 December 2012 was 723,970 (2011: 776,714).

Hedging reserve

Under cash flow hedge accounting, movements on the effective portion of hedges are recognised through the hedging reserve, whilst any ineffectiveness is taken to the income statement.  Cumulative movements recognised through the hedging reserve are recycled through the income statement on disposal of the associated joint ventures.

Notes to the condensed consolidated financial statements

For the year ended 31 December 2012

1 General information

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2012 or 2011 but is derived from those accounts.  A copy of the statutory accounts for 2011 was delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's annual general meeting. The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

          This preliminary announcement has been prepared solely to assist shareholders in assessing the strategies of the Board and in gauging their potential to succeed. It should not be relied on by any other party or for other purposes. Forward looking statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this preliminary announcement. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business factors, underlying any such forward looking information.

While the financial information included in this preliminary announcement was prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS.

In accordance with the Companies Act 2006, the Company will make the annual report and accounts for the year ended 31 December 2012 that comply with IFRS available on the Company's website on or about 25 March 2013. If a shareholder has requested to continue to receive a hard copy of the annual report and accounts it will be posted on or about 25 March 2013. A copy will be delivered to the Registrar of Companies following the Company's annual general meeting.

2 Basis of preparation

The Group's activities and the key risks facing its future development, performance and position are set out in this preliminary announcement and in its annual report and accounts for the year ended 31 December 2012.

3 Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report.  Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

4 Accounting policies

There have been no significant changes to accounting policies, presentation or methods of preparation since the financial statements for the year ended 31 December 2011 and the period to 30 June 2012.

 5 Business segments

For management purposes, the Group is organised into five operating divisions: Construction and Infrastructure, Fit Out, Affordable Housing, Urban Regeneration and Investments. The divisions' activities are as follows:

·    Construction and Infrastructure: offers national design, construction and infrastructure services to private and public sector clients.  The division works on projects and frameworks of all sizes across a broad range of sectors including commercial, defence, education, energy, healthcare, industrial, leisure, retail, transport and water.

·    Fit Out: specialises in fit out and refurbishment projects in the commercial and government office, education, retail, technology and leisure markets. Overbury operates as a national fit out company through multiple procurement routes and Morgan Lovell specialises in the design and build of offices.

·    Affordable Housing: specialises in the design and build, refurbishment and maintenance of homes and the regeneration of communities across the UK.  The division operates a full mixed-tenure model creating homes for rent, shared ownership and open market sale.

·    Urban Regeneration: works with landowners and public sector partners to unlock value from under-developed assets to bring about sustainable regeneration and urban renewal through the delivery of mixed-use projects. Typically projects create commercial, retail, residential, leisure and public realm facilities.

·    Investments: facilitates project development, primarily in the public sector, by providing flexible financing solutions and development expertise. The division covers a wide range of markets including urban regeneration, education, healthcare, housing, emergency services, defence and infrastructure.

Group Activities represents costs and income arising from corporate activities which cannot be allocated to the operating segments. These include costs such as treasury management, corporate tax coordination, insurance management, pension administration and company secretarial services. The divisions are the basis on which the Group reports its segmental information as presented below:

2012
	Construction and Infrastructure	Fit Out	Affordable Housing	Urban Regeneration	Investments	Group Activities	Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Revenue: external	1,168.1	426.8	385.8	62.3	4.1	-	-	2,047.1
Revenue: inter-segment	0.1	10.0	-	-	-	-	(10.1)	-
Included in profit/(loss) below:
Share of results of associates and joint ventures after tax	-	-	(0.3)	0.3	5.7	-	-	5.7
Profit/(loss) from operations before amortisation and non-recurring items	19.7	11.3	11.5	2.7	7.4	(4.5)	-	48.1
Amortisation of intangible assets	-	-	(0.8)	(2.1)	-	-	-	(2.9)
Non-recurring items	(6.8)	-	(2.5)	-	(0.2)	(0.5)	-	(10.0)
Profit/(loss) from operations	12.9	11.3	8.2	0.6	7.2	(5.0)	-	35.2
Net finance expense								(1.0)
Profit before income tax expense								34.2

During the year ended 31 December 2012 and the year ended 31 December 2011, inter-segment sales were charged at prevailing market prices and significantly all of the Group's operations were carried out in the UK.

2011
	Construction and Infrastructure	Fit Out	Affordable Housing	Urban Regeneration	Investments	Group Activities	Eliminations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Revenue: external	1,267.8	438.0	462.3	56.6	1.9	-	-	2,226.6
Revenue: inter-segment	0.2	7.0	3.2	-	-	-	(10.4)	-
Included in profit/(loss) below:
Share of results of associates and joint ventures after tax	-	-	(0.1)	(1.2)	1.6	-	-	0.3
Profit/(loss) from operations before amortisation and non-recurring items	21.1	12.4	18.5	3.9	(3.9)	(5.9)	-	46.1
Amortisation of intangible assets	-	-	(0.9)	(3.0)	-	-	-	(3.9)
Non-recurring items	(1.4)	-	-	-	-	-	-	(1.4)
Profit/(loss) from operations	19.7	12.4	17.6	0.9	(3.9)	(5.9)	-	40.8
Net finance expense								(0.8)
Profit before income tax expense								40.0

6 Income tax expense

		2012	2011
		£m	£m
Current tax expense/(credit):
UK corporation tax		5.4	10.0
Adjustment in respect of prior years as set out below		(0.8)	(25.1)
		4.6	(15.1)
Deferred tax (credit)/expense:
Current year		(1.3)	(1.0)
Adjustment in respect of prior years as set out below		0.2	23.3
		(1.1)	22.3
Income tax expense for the year		3.5	7.2

		2012	2011
Current tax expense:		£m	£m
Profit before tax		34.2	40.0
Less: post tax share of profits from joint ventures		(5.7)	(0.3)
		28.5	39.7
UK corporation tax rate		24.5%	26.5%
Income tax expense at UK corporation tax rate		7.0	10.6
Tax effect of:
Gain on disposal of equity accounted joint ventures not giving rise to a tax liability		(2.2)	-
Expenses that are not deductible in determining taxable profits		0.9	0.3
Agreement with HMRC (see below)		-	(2.8)
Other adjustments in respect of prior years		(0.6)	(0.5)
Other effect of expected forthcoming change in tax rates upon closing deferred tax balance		(1.5)	(0.1)
Other		(0.1)	(0.3)
Income tax expense for the year		3.5	7.2
Effective tax rate for the year		12.3%	18.1%

The low effective tax rate for 2012 arises primarily as a result of there being no expected tax liabilities upon the gains on disposals of investments during the year, together with the effect of revaluing the deferred tax liabilities to reflect changes in the statutory rate of corporation tax from 25% to 23%.  After adjusting for these two items the tax charge is approximately equal to tax at the UK corporation tax rate on profit before tax excluding joint venture profit, which is reported after tax.

During 2011 the Group resolved its discussions with HMRC concerning corporation tax matters arising following the acquisition of certain businesses and assets from Amec in 2007. This gave rise to a net £2.8m reduction in the 2011 tax charge.

7 Dividends

Amounts recognised as distributions to equity holders in the year:
	2012	2011
	£m	£m
Final dividend for the year ended 31 December 2011 of 30.0p (2010: second interim dividend of 30.0p) per share	12.7	12.7
Interim dividend for the year ended 31 December 2012 of 12.0p (2011: 12.0p) per share	5.1	5.1
	17.8	17.8
Proposed dividend:
	2012	2011
	£m	£m
Proposed final dividend for the year ended 31 December 2012 of 15.0p (2011: final dividend of 30.0p) per share	6.4	12.8

The proposed final dividend of 15.0p is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements.

The proposed final dividend will be paid on 24 May 2013 to shareholders on the register at 3 May 2013.

The ex-dividend date will be 1 May 2013.

8 Earnings per share

There are no discontinued operations in either the current or comparative years.

The calculation of the basic and diluted earnings per share is based on the following data:

		2012	2011
Earnings	Notes	£m	£m
Earnings before tax		34.2	40.0
Deduct tax expense per the income statement	6	(3.5)	(7.2)
Non-controlling interests		0.1	0.1
Earnings for the purposes of basic and dilutive earnings per share being net profit attributable to owners of the Company		30.8	32.9
Add back:
Amortisation expense		2.9	3.9
Earnings for the purposes of adjusted basic and dilutive earnings per share being net profit attributable to owners of the Company adjusted for amortisation expense		33.7	36.8
		2012	2011
Number of shares		No. '000s	No. '000s
Weighted average number of ordinary shares for the purposes of basic earnings per share		42,497	42,442
Effect of dilutive potential ordinary shares:
Share options		238	204
Conditional shares not vested		45	357
Weighted average number of ordinary shares for the purposes of diluted earnings per share		42,780	43,003

The average market value of the Company's shares for the purpose of calculating the dilutive effect of share options and long-term incentive plan shares was based on quoted market prices for the year that the options were outstanding. The weighted average share price for the year was £6.41 (2011: £6.30).

Earnings per share as calculated in accordance with IAS 33, 'Earnings per Share' are disclosed below:

		2012	2011
Basic earnings per share		72.5p	77.5p
Diluted earnings per share		72.0p	76.5p
Earnings per share adjusted for amortisation expense:
		2012	2011
Basic earnings per share adjusted for amortisation expense		79.3p	86.7p
Diluted earnings per share adjusted for amortisation expense		78.8p	85.6p

A total of 1,030,688 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 31 December 2012 (2011: 2,311,976).

9 Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.

Trading transactions

During the year, Group companies entered into transactions to provide construction and property development services with related parties, all of which were joint ventures, not members of the Group. Transactions and amounts owed at the year end in relation to joint ventures are as follows:

		Provision of goods and services		Amounts owed by/(to) related parties
Joint venture		2012	2011	2012	2011
		£m	£m	£m	£m
Claymore Roads (Holdings) Limited		-	-	-	0.4
Community Solutions Investment Partners Limited	(a)	1.7	2.1	-	0.3
Renaissance Miles Platting Limited		0.1	0.1	-	-
Blue Light Holdings Limited	(a)	-	0.3	-	-
Ashton Moss Developments Limited		-	-	(0.1)	(0.2)
Bromley Park Limited		-	-	(0.6)	(0.6)
ECf (General Partner) Limited		1.4	2.0	-	-
Lewisham Gateway Developments Limited	(b)	-	-	-	0.2
The Compendium Group Limited		4.5	3.7	2.0	0.6
Access for Wigan (Holdings) Limited		-	19.5	0.1	0.3
Hull Esteem Consortium PSP Limited		44.1	46.7	1.9	1.2
St Andrews Brae Developments Limited		-	2.8	0.1	0.1
Taycare Health (Holdings) Limited		0.2	-	0.1	-
The Bournemouth Development Company LLP		0.1	0.1	1.3	0.5
		52.1	77.3	4.8	2.8
(a) During the year the Group disposed of its interests in Community Solutions Investment Partners Limited and Bluelight Holdings Limited
(b) In 2012 Lewisham Gateway Developments Limited became a wholly owned subsidiary of the Group

			Amounts owed by/(to) related parties
			2012	2011
			£m	£m
Amounts owed by related parties			5.5	3.6
Amounts owed to related parties			(0.7)	(0.8)
			4.8	2.8

In addition, during the year, consultancy services were provided to the Company by a wholly owned subsidiary of Chime Communications plc, of which Simon Gulliford is a director, for an amount of £0.1m. There were no amounts outstanding at the balance sheet date.

All transactions with related parties were made on an arm's length basis.

The amounts outstanding are unsecured and will be settled in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given to or received from related parties. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed to or owing by related parties are non-interest bearing.

Remuneration of key management personnel

The remuneration of the directors, who are key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'.

		2012	2011
		£m	£m
Emoluments		2.3	3.2
Social security contributions		0.4	0.4
Termination benefits		0.5	-
Post-employment benefits		0.2	0.2
		3.4	3.8

Directors' material interests in contracts with the Company

No director held any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 19 February 2013.

10 Contingent liabilities

Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating companies in the Group. There are contingent liabilities in respect of surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.

As at 31 December 2012, contract bonds in issue under uncommitted facilities covered £186.5m (2011: £204.1m) of contract commitments of the Group.

11 Joint ventures

Additions

The increase in investments in joint ventures during the year was mainly due to an additional equity investment in ISIS Waterside Regeneration Partnership of £18.5m on 22 November 2012, which increased the Group's interest in the joint venture from 25% to 50% and additional debt investment of £4.7m in Taycare Health (Holdings) Limited, £2.7m in Renaissance Miles Platting Limited and £2.4m in HB Community Solutions Holdco Limited.

Disposals

The disposals of investments in joint ventures principally relate to the following transactions:

i)        On 16 February 2012 the Group sold its 33.5% holding in the Dorset Fire and Rescue PFI Project for cash consideration of £3.8m. The gain on disposal was £1.8m.

ii)       On 20 July 2012 the Group sold its NHS LIFT and medical properties interests in Community Solutions Investment Partners Limited and CSPC (3PD) Limited, both equity accounted joint ventures in which the Group held a 50% share, for cash consideration of £23.9m. The gain on disposal was £7.0m, comprising a gain of £9.1m in respect of the investments and a loss of £2.1m in respect of the hedging reserve which was recycled to the income statement. The transaction costs were £1.5m. 

The disposals are in line with the Group's strategy of realising investments as they mature, in order to redeploy capital into new projects.

iii)      On 20 December 2012 the Group, through its subsidiary Muse Developments Limited, acquired from Taylor Wimpey UK Limited its 50% interest in the jointly owned Lewisham Gateway Developments Limited for £0.4m. As a result of the transaction, Muse Developments Limited now owns the entire issued share capital of Lewisham Gateway Developments Limited. This transaction has been accounted for as a step acquisition under IFRS 3 'Business Combinations' and accordingly is shown as a disposal of an investment in a joint venture.

The fair value of the consideration payable to Taylor Wimpey UK Limited for the purchase was £0.4m. Of this, £0.1m was paid in cash during the year and the remaining consideration will be paid upon reaching specified project milestones. There were no acquisition-related costs.

Due to the proximity of the acquisition date to the balance sheet date, the fair values assigned to the identifiable assets and liabilities acquired are provisional. The provisional fair value of the Group's existing 50% interest in Lewisham Gateway Development Limited was £1.4m, comprising equity of £1.2m and goodwill of £0.2m. The directors determined that the provisional fair value of the pre-existing interest in the joint venture was different from its previous carrying value of £1.7m, which resulted in a loss on re-measurement of £0.3m.

The total fair value of the Group's original interest and the consideration payable for the additional 50% interest total £1.8m. The fair value acquired totalled £2.1m, thereby giving rise to a gain on a bargain purchase of £0.3m.

12 Subsequent events

There were no significant subsequent events that affected the financial statements of the Group.

Responsibility statement

The responsibility statement below has been prepared in connection with the Company's annual report and accounts for the year ended 31 December 2012. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

(a)  The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

(b)  The business review, which is incorporated in the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This responsibility statement was approved by the Board on 19 February 2013 and is signed on its behalf by:

John Morgan                 David Mulligan

Chief Executive             Finance Director

19 February 2013

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