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UK — Pre-tax profit edges up at Morson Group

21 September 2010

Revenues were up by +0.9% from 219.9 million Pounds in H1 2009 to 221.8 million Pounds in H1 2010 at Morson Group Plc (MRN:LSE), the provider of technical engineering personnel and project design solutions.

Interim results for the six months ended 30 June 2010 published today reveal that net fee income (gross profit) was down by -7.7% from 18.1 million Pounds in H1 2009 to 16.7 million Pounds in H1 2010.

Profit from operations was down by -0.6% from 5.5 million Pounds in H1 2009 to 5.4 million Pounds in H1 2010.

Profit before tax was up by +7.7% from 4.9 million Pounds in H1 2009 to 5.3 million Pounds in H1 2010. Adjusted profit before taxation was down by -22% from 5.4 million Pounds in H1 2009 to 4.2 million Pounds in H1 2010 excluding fair value on derivatives, amortisation of intangible fixed assetsand exceptional income.

The acquisition of the business and assets of the Wynnwith Group from its administrator was achieved via a 51% owned new subsidiary, Morson Wynnwith Limited, on 9 June 2010, just prior to the end of the reported period. Revenue included in the group results for the period was 5.3 million Pounds (representing circa four weeks' trade), which would infer an annualised run-rate of approximately 70 million Pounds. All key contracts have been retained.

This is the largest acquisition Morson has made to date and complements the existing operations with its focus on aerospace, defence and rail sectors along with several other complementary niche areas. The acquisition has resulted in an exceptional gain being realised from the transaction as good collections of debt acquired have been achieved.

Morson estimate the quantum of this acquisition at 0.7 million Pounds at present (net of acquisition costs of 0.2 million Pounds). The Wynnwith business acquired had been historically loss-making. There will be notable costs involved in this exercise, which will be incurred and charged to the second half of this year. The board are confident that Morson Wynnwith will be profitable in 2011.

The acquisition of the business of Acetech Services Limited was achieved just after the close of the reporting period (9 July 2010) and saw the group take over the operations of the UK 'in-house' recruitment business of the Babcock Group. Morson have gained lengthy contracts to supply to the UK Babcock Marine and Rail divisions together with the staff, database and contacts, which will help this business grow and supplement wider supply to the Babcock Group.

Aerospace and Defence
Performance in this sector, the largest in the group, has again been strong, benefiting from core substantial agreements with Xchanging/BAE Systems, Airbus and Thales. Morson's strength in this sector is that it spans both military and civil aircraft programme development and have seen somewhat of a shift in activity through this period towards the civil side. There remain notable projects requiring specialist skills such as the Queen Elizabeth carrier, Airbus 320 and Bombardier Learjet 85 programmes. In relation to the Defence Sector, Morson anticipate that the forthcoming UK Government's Defence Review, due October 2010, will provide greater clarity with regard to future spending focus and activity. The group does not feel the current level of defence business will materially change as several projects are maintenance-driven and outsourcing remains a competitive and cost effective way for projects to be discharged.

The civil aerospace market is very competitive and investment into new 'green' technologies which deliver savings on fuel and engine maintenance is fundamental to its future. Morson has experience of this and is working with clients in the development and modification of existing and of conceptual aircraft and engine programmes, requiring significant specialist skills and technical engineering support.

Nuclear and Power
Morson have experienced slightly increasing levels of business in this area over the last six months. The second half of this year will, however, see a reduction in revenue due to the Magnox contract falling away. Nevertheless, Morson remain excited about future opportunities. The UK nuclear new build programme has been initiated, albeit currently at low levels and with varying degrees of urgency, by some of the major power providers and consortia set up to bid for and deliver power to the market. Morson has relationships with many of these and has been providing engineering talent in this field for over thirty years. Morson supplied over 400 engineers over the project life of the last PWR nuclear plant to be built at Sizewell and is geographically very well placed to take advantage of the emerging energy markets. The potential for growth in this sector is evident and increasing and will result in demand for specialised human capital and engineering consultancy services, with the timing dependent on macro-economic factors. At present the maintenance of existing power stations is also key and this activity must continue through any build cycle, before turning into decommissioning work. Morson aims to play an important role in the support, maintenance, new build and eventual decommissioning of the UK's current nuclear power renaissance.

Rail and Transport Infrastructure
The group provides expertise and workforce resource solutions to both the London Underground and the National Overground Networks. Activity under the core framework contracts has been slightly suppressed over the period as within the London Underground environment there has been a period of change as Transport for London has consolidated operations previously let under Metronet and Tubelines operations. Morson have bid for and been awarded renewed contracts to extend the supply into this wider business. Morson supply a variety of white collar engineering skills and also the hands on skills of track workforces, safety critical resource and other track maintenance and enhancement skills.

Overground activity with Network Rail has been at a low-level, however, the group anticipates this will increase over the coming periods via maintenance works and the London Cross Rail project. Morson continue to enhance market position in this area and have the addition of contracts to support Babcock Rail and Thales, whilst the Wynnwith acquisition also brings several other client relationships that can developed.

Other developing markets
The group continues to explore a number of markets that hold potential for future growth. In particular, the telecoms market holds potential with customers who have global overseas operations. The last period has seen operations commence in Brazil, together with the opening of an office in Hamburg, Germany. Other overseas investment opportunities and regions are being explored. Office launches are scheduled for Johannesburg and St Petersburg before the end of this year to exploit opportunities in telecoms, rail and utilities. In the period the total overseas recruitment office revenues are minor at 1.1 million Pounds and slightly loss-making, however, collectively Morson expect these overseas operations to be a net contributor at operating level in the second half of the year.

Morson Projects: Provision of Engineering Design Consultancy and Management Services
This business segment has also seen a challenging environment with reduced workloads and competitive pressure on margins. However, Morson Projects has the diversity across Aerospace, Nuclear and our expanding Energy and Power offering to adapt and exploit opportunities. The current lower level of military aerospace activity is therefore balanced by our groundbreaking work with Bombardier Canada in assisting them on the Learjet 85 programme. This involves significant levels of design using lightweight composite materials and Moson feel this expertise is something that will be embraced in most future aircraft design and modification. Within the Nuclear offering the group continues to bid for and win substantial levels of design engineering works for the Sellafield site, this being transferrable skills and knowledge, which the group believes will also be needed for new build sites. Morson Projects remains a key differentiator for the group and as clients seek cost effective solutions to deliver programme efficiencies.

Gerry Mason, Non-Executive Chairman, said "the group has historically remained resilient in difficult economic cycles and, whilst we have been affected by the scale of the current UK economic recession, we have performed well."

"The move into our new headquarters bringing together Morson International and Morson Projects gives the business an added impetus, increasing opportunities for cross selling our services and providing a modern and efficient environment conducive to taking the group forward in the coming years."

"We will continue to build on our experience and capability and plan intelligently to progress our longer term prospects and develop future opportunities, including consideration of appropriate acquisitions. Whilst we expect market conditions to remain challenging into 2011, we firmly believe that the prospects for the group and its long term future growth are encouraging."

Morson is targeting annual revenues of more than 500 million Pounds in 2011.

In early trading Morson Group's shares were down by -3.15% to 98.30 Pence.



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