Kier's broad appeal

One attraction of Kier (KIE) is the diversity of revenue streams from its construction, services and property divisions. These flow from civil engineering, support services, residential and commercial property development through to infrastructure project investment. True, the bulk of the work generates relatively low profit margins (2.3 per cent on construction and 4.3 per cent on support services), but these have been maintained or bettered so far this year, and there is a lot of work either contracted or in the pipeline. In fact, virtually all the work targeted for 2013-14 is in the bag and the order book stands at more than £6bn.

The biggest change has taken place in the services division, following last year's acquisition of May Gurney. This division now generates more income than the construction side, and covers seven businesses - housing maintenance, environmental, facilities management, highway maintenance, utilities, fleet and passenger services, and waterways services. May Gurney's acquisition racked up exceptional costs of £22m, but in the first half of the current year it brought in operating profits of £14m. Meanwhile, cost savings arising from the integration are expected to reach £5m during 2013-14. The effect on turnover was equally dramatic, rising 167 per cent to £563m; without May Gurney, the rise was still 7 per cent.

Crucially, Kier is now better placed to present a comprehensive range of services to local authorities looking to outsource services. It has also improved its position in key areas such as utilities, highways and water, and over £450m of new business was secured in the first half, taking the services' order book up to £3.6bn. Some sectors have fared less well, however; notably the environmental business, where the value of waste-collection contracts for Bristol, Cheshire West and Chester local authorities (acquired with May Gurney) required a £68m write-down, £52m of which reflected the fact that the contracts were loss-making.

On the construction side, Kier's expertise in building and civil engineering helped to secure a number of key projects, and crucially much of this came through 'framework' agreements, which usually offer scope for further deals. This means that the secured or probable £2.5bn order book represents the entire forecast revenue for the year, and two-thirds of next year's. Underpinning this, Kier has secured a number of contracts through the Priority Schools Building Programme and further work for the Ministry of Defence. Kier is also developing its presence in affordable housing, where nearly three-quarters of all work is being carried out through long-term framework agreements. Further work has also been secured to deliver a mixed residential scheme as part of London's King's Cross redevelopment.

The property division, though small, has performed particularly well. It pushed profits ahead by 56 per cent to £10.6m in the first half, delivering a return on capital of 15 per cent. Two pre-let commercial developments provided much of the uplift, while further similar deals are in the pipeline.

Cash outflow from operating activities in the first half was £65m, much the same as a year earlier. However, following the May Gurney acquisition, the state of the group's balance sheet has deteriorated markedly. From having no net debt in December 2012, the group had £220m, or 70 per cent of shareholders' funds, a year later - a level that must not rise further.