Kier (KIE) is beginning to gain traction as spending on infrastructure starts to accelerate. But uncertainty surrounding the upcoming election has dented sentiment towards the stock and the shares have fallen 7 per cent since the release of strong half-year results in February. However, we feel confident about the longer-term growth potential, and with a forecast dividend yield of 4.8 per cent this year, rising to 5.2 per cent next, the recent share price weakness provides an attractive entry point.
- Solid pipeline of new work
- Attractive dividend
- Significant boost from May Gurney acquisition
- Acceleration in infrastructure spending
- Margins a little lower
- Environmental business still challenging
Part of Kier's attraction is its diverse revenue stream, which should help protect against any unwelcome post-election surprises. Kier is an active player in construction, facilities management and property, as well as building houses under the Kier Residential banner.
The construction business has been particularly active, with revenue up 18 per cent in the first half at £874m. And while first-half margins were a little lower at 2.1 per cent, profitability looks robust compared with rivals that have come unstuck making unrealistic bids just to maintain turnover, or worse still, entered into fixed-price contracts. Kier has avoided these pitfalls while building secured-and-probable orders of £2.6bn. It has already met its targeted revenue for the whole year and work is nicely balanced, split roughly evenly between the public and private sector.
Kier's services division covers a range of activities from highways, facilities management, utilities and environmental services. This diverse offering has been widened further with the successful integration of May Gurney, which has helped secure a number of new contracts. Operating margins fell slightly in the first half to 4.2 per cent, but this reflects an increase in set-up and bidding costs associated with new contracts. In fact, Kier reckons that operating margins should be back towards 5 per cent by the end of the year.
Kier's integrated offering is serving it well. Last month, it was selected for all of the three lots under the Southern Construction Framework to serve the construction needs of the public sector, and over four years is expected to be worth around £2bn. Framework agreements are important because once selected a participating company can expect to receive further work at the exclusion of those companies not selected. Further earnings visibility can be seen in the highways division, helped in part by a belated recognition by the government that a lot of roads need increased maintenance. Typically, many existing contracts with local authorities have now been extended, in some cases to March 2017.
KIER (KIE) | ||||
---|---|---|---|---|
ORD PRICE: | 1,590p | MARKET VALUE: | £882m | |
TOUCH: | 1,588-1,590p | 12-MONTH HIGH: | 1,886p | LOW: 1,374p |
FORWARD DIVIDEND YIELD: | 5.2% | FORWARD PE RATIO: | 12 | |
NET ASSET VALUE: | 512p* | NET DEBT: | 55% |
Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
---|---|---|---|---|
2012 | 2.07 | 53.0 | 111 | 66 |
2013 | 1.98 | 47.5 | 95.4 | 68 |
2014 | 2.99 | 73.1 | 108 | 71 |
2015* | 3.38 | 87.0 | 124 | 77 |
2016* | 3.56 | 93.0 | 130 | 82 |
% change | +5 | +7 | +5 | +6 |
Normal market size: 750 Matched bargain trading Beta: 0.86 *Includes intangible assets of £325m, or 586p a share **Numis forecasts, adjusted PTP and EPS figures |
The only blot on an otherwise impressive acceleration in trading is the waste-collection business inherited with May Gurney. Losses were racked up in waste collection contracts with Bristol, and Cheshire West and Chester local authorities. Turnaround plans are in place and at the half-year stage Kier described the performance of the environmental business as stable but challenging.
Kier Residential has taken full advantage of the growing demand for housing, and around 700 completions were made in the first half. These were built on land owned by Kier, and at the end of 2014, the land bank stood at over 3,600 units. Here again, Kier is spreading its revenue streams, to include private sales, affordable housing and joint ventures. And while revenue rose from £72m to £90m in the first half, sales are expected to be favourably weighted towards the second half, putting the group on track to deliver more than 2,000 completions for the year.
Group finances are in pretty good shape, too, with £50.9m of net cash generated from operating activities in the first half. Net debt was lower than expected but still rose from £123m in June last year to £156m, although that was after investment of £37m in the business. Balance-sheet financing was strengthened with a US private placement that raised £120m.
Kier has also continued to deliver a steady increase in the dividend payout, and for 2016 analysts at Numis Securities are forecasting a payout that on the current share price will yield over 5 per cent.