There must be a limit to how long Morson (MRN) can keep on blaming a weak UK economy for its problems. There seems to be something fundamentally wrong with its business model.
Since it was floated on the stock market in 2006 its revenues have risen over 50 per cent, yet profits have fallen for four years in a row and operating margins have more than halved. How much longer is the company going to accept lower margin business to protect its so-called ‘leading’ market position as the UK’s largest technical staffing company?
Last December’s decision to axe its final 4p a share dividend suggests that the board has finally woken up to the fact that MRN cannot go on as it is. Net debt stood at £10.9m in 2009, had more than doubled to £23.2m by end 2010 and averaged £37.1m in December 2011.
MRN’s short-term problem seem to be concentrated on Morson Projects (MP), its engineering design business, which counts for less than 10 per cent of group revenues but contributed 19 per cent of operating profits in 2010. The statement that MP’s 2011 performance has been hit by “cost and timing overruns on certain large fixed price contracts” should send shivers down the spines of MRN’s long-suffering shareholders.
At the interim stage Morson was boasting that MP’s ‘record revenues’ were ‘encouraging’. It noted that margin pressure was ‘very apparent’ particularly within the aerospace sector. But it believed that ‘the investment made to achieve this growth and the expertise gained will position the company well to gain future work’. How many times before have we heard this sort of justification from a management which does not understand the risks of the business it is getting in to?
Whilst MRN will no doubt have plenty of excuses for its latest performance, when it reports its full results in mid-March, it is worth underlining the scale of MRN’s long-term underperformance.
MRN was floated in 2006 at 160p a share. Since then the stock market has fallen by 3.5 per cent whilst MRN’s shares have fallen 73 per cent. MatchTech, a staffing company half MRN’s size, was floated in the same year. Its shares have also underperformed the market since its float. But its current stock market capitalisation is more than twice as high as MRN’s, although it remains a smaller business.
MRN’s board remains confident in its “ability to deliver growth in the medium and long term”. Growth in what? MRN’s revenues have certainly grown but nothing else has, apart from its top executive pay.
One of the supposed benefits of having a large family shareholding (MRN’s chairman and CEO own 45 per cent), is that it should encourage the good stewardship of a company’s assets over the long-term. However, it also means that it is well nigh impossible to replace the chairman and chief executive when things start to go wrong, as now seems to be the case with MRN.