Builder puts brain before brawn

Most investors still believe British construction is an industry with poor management, stuck in a never-ending slump with endemic over- capacity keeping profitability at rock bottom levels.

Edinburgh-based Morrison Construction, however, is a formidable example of the expression that "when the going gets tough, the tough get going". Since 1989, in anticipation of hard times, the group has transformed its approach. It has abandoned traditional ways of winning work - by making the lowest tenders and then engaging in escalating cost-wars with clients and architects - and, instead, taken a more creative line on projects, while initiating and part-funding them in partnership with its clients, too.

The outcome has been that clients end up spending less for a better result, while Morrison makes more money. It's a more-brain-less-brawn approach. Morrison has about 90 people organised into three and four-person development teams around the country, their skills including marketing, law and finance, property development, value engineering and design.

The teams generate work by developing project ideas and offering clients designed schemes, which may include finance.

Fraser Morrison, the firm's chairman, estimates that it costs between pounds 4m and pounds 5m a year to keep the teams in place. The group operates like a cross between a construction firm and a property developer, and pays great attention to rigorous risk management. In projects akin to property development they pre-let or prefund work to cut risk. And a policy of turning over capital within one year means that they have ended the 1995- 1996 financial year with pounds 18.2m in cash, despite committing over 60 per cent of the pounds 18.6m raised on flotation in October 1995 to finance forthcoming projects.

Back in 1989, Fraser and Gordon Morrison bought back from Charter Consolidated the business originally founded and sold by their father. Sales were about pounds 100m and net assets pounds 1m. But before the flotation, sales had more than doubled, and net assets had leapt up. By March 31 this year, the firm stood at pounds 43m, and can be expected to climb strongly. The proportion of turnover secured on a non-traditional basis has grown from under 20 per cent in 1989 to 65 per cent last year, with a target of 80 per cent by 2000. Margins have trebled to 5.5 per cent in the past two years.

Fraser Morrison expects margins to stabilise at this level, with the focus on expanding turnover, which will be from pounds 230m to pounds 240m in the current year.

Another key measure of their progress is the 40 large-scale projects this year, compared with 30 last year and 20 the year before. The group also has a growing international business; it played an important role in rebuilding Kuwait after the Gulf war and has projects in Russia, including plans to redevelop a former royal palace in St Petersburg as a five-star hotel .

The firm's shift away from public sector work is shown by the way the building and property division has cut its exposure to this type of work from 80 per cent between 1988 and 1989, to under 20 per cent now. The group is, however, suited to the Private Finance Initiative, expected to be an important future source of projects.

Forecasters believe profits may advance to pounds 14m this year and pounds 16m next. In the short-term, earnings per share will only advance modestly from 13.2p to 13.8p, reflecting the large increase in issued share capital. But next year the earnings per share benefits are expected to be greater with an advance to 15.7p.

My hunch is that these numbers are not hugely meaningful in assessing Morrison. Shareholders' funds have risen some 25-fold since 1989 despite a shattering recession, so the management is clearly talented. With a more buoyant operating background through the 1990s and beyond, they should deliver excellent returns for shareholders.