Kier pulls in the business

Construction and property group Kier is continuing to deliver a solid performance despite the tough trading environment. The construction side of the business has already secured 86 per cent of targeted revenue for the year to June 2012, driven by the group’s success in establishing long-standing relationships with its key clients. Kier’s primary targets will be picking up further work in the power and waste sectors as well as building on existing framework agreements.

And the services side, which includes building maintenance work, has maintained the order book at £2bn and continues to attract new work, notably a £64m deal with Sheffield City Council. Even the house building division is performing well, and the decision earlier this year to reduce the size of the land bank to match a planned reduction in completions is expected to generate a cash return of around £30m over the next two years. Operating margins have been maintained at 2 per cent on the construction side and 4.5 per cent in the services division. Kier’s finances remain in good shape too, with analysts expecting net cash on the balance sheet to have risen to around £187m at the June year-end.

Numis Securities says…

Buy. Kier is showing solid organic growth, and this is likely to be supplemented by bolt-on acquisitions financed by cash raised from running down the land bank and realising private finance initiative (PFI) equity disposals. The support services side is expected to benefit from a review of working practises by local authorities, where Kier should gain from its integrated business model, expertise and established relationships already in place. Moreover, outsourcing opportunities from local authorities are anticipated to accelerate in 2012 as the full impact of the drive to improve efficiencies and save money comes through. Expect pre-tax profits of £65m and EPS of 132p in the 12 months to June 2011.

Investec says…

Buy. Kier envisages a target market in support services worth £107bn. As well as councils needing to outsource, the UK needs considerable investment in infrastructure, notably transport and power, and Kier’s embedded relationships will give it a competitive advantage. The timing of the workload generated by this is less predictable, but the opportunities for Kier look real. Any short-term concerns about the construction business have been banished as most of next year’s workload is already secured. Based on a sum-of-the-parts valuation, we are maintaining a share price target of 1,800p. Expect pre-tax profits of £64m and EPS of 126p in the year to June 2011, rising to £67m and 132p, respectively, the year after.