For investors willing to go into a risky area, such as construction, better to have the security of holding shares in a company with diversified revenue streams. And that's what Kier is all about.
- Strong order book
- Diversified revenue stream
- Useful growth from property division
- Decent dividend yield
- Margins coming under further pressure
- Squeeze on council spending
Kier has three divisions - construction, services and property - and each has several revenue streams. Services, for example, comprises maintenance work for local authorities and housing associations; facilities management, which works for both the public and the private sectors; and environmental, which covers such things as waste collection.
This diversified revenue stream gives Kier a distinct advantage in today's economic climate. And Kier's bosses are under little illusion about how tough the market will remain for a year or so, as spending cuts and deferred capital investment leave their mark. What's more, a smaller pot of potential business increases the competition, so profit margins will stay under pressure. In the half year to end December, operating margins in construction slipped from 2.7 per cent to 2.5 per cent, though on the services side they were maintained at 4.5 per cent.
Happily, that's almost all the bad news, and Kier's attractions lie in the group's longer-term prospects. True, discretionary spending - such as replacing window frames and bathrooms in council houses - is being defered by some local authorities, but Kier's broad reach means its order books are being maintained.
KIER (KIE) | ||||
---|---|---|---|---|
ORD PRICE: | 1,299p | MARKET VALUE: | £504m | |
TOUCH: | 1,295-1,299p | 12-MONTH HIGH: | 1,489p | LOW: 1,034p |
DIVIDEND YIELD: | 4.9% | PE RATIO: | 9 | |
NET ASSET VALUE: | 403p | NET CASH: | £131m |
Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2008 | 2.37 | 63.4 | 131 | 55 |
2009 | 2.15 | 24.8 | 44.1 | 55 |
2010 | 2.10 | 57.7 | 108 | 58 |
2011 | 2.18 | 72.5 | 166 | 64 |
2012* | 2.20 | 70.0 | 149 | 64 |
% change | +1 | - | - | nil |
Normal market size: 600 Matched bargain trading Beta: 1.0 *Numis Securities estimates (profits & earnings not comparable with historic figures) |
The construction side has all its targeted revenue for 2011-12 already in the bag, and two thirds of 2012-13's; for the services side, the bagged proportions are 95 per cent of this year's target and three quarters of next year's. This will help Kier through a long and tough phase. But the hope remains that deferred spending on housing, construction and the infrastructure will eventually materialise, suggesting that Keir's work load will balloon when it does.
While Kier has been winning new business in its established divisions, it has manoeuvred itself into new areas. One such is in power generating, where Kier is one half of a joint venture that has won a £100m contract for work on the Hinkley Point C nuclear power station in Somerset. This is the first major package of a massive power-station programme. Within the £4.5bn cost of each site, there is around £2bn of construction work and Kier has a foot in the door. Other opportunities exist in facilities management, which involves maintaining buildings for big property owners, such as Legal & General. Kier has grown this business from nothing, but turnover is small (£78m in the first half of 2011-12) so management may accelerate growth through acquisitions. The property division is also being expanded and the property development pipeline is valued at £700m; divisional operating profits in the first half jumped to £10m from £3.4m in the last first half.