Kier continues to build

Kier could be dismissed as an unexciting business that generates only low profit margins. Against that, in the current economic climate its defensive qualities are attractive. The group has a diversified revenue stream. This ranges from construction, which covers major building and civil engineering work as well as affordable housing, to support services, private housing, commercial property development and private-finance-initiative schemes with the public sector.

But the primary source of income comes from its construction activities - 70 per cent of turnover and 62 per cent of pre-tax profits in the latest full year - where public sector work accounts for 75 per cent of the contracts secured so far this year. Add on contracts where Kier is the preferred bidder, and secured revenue tops 80 per cent of the target for the financial year just begun. Of course, there is a worry that state-funded projects are likely to come under pressure as the government tightens its purse strings. The situation remains unclear, but Kier's bosses believe that spending on schools and hospitals stands the best chance of escaping any cuts in state spending.

Besides, there is plenty of work in the private sector, in particular from operators of utilities. Business secured in the current year includes a £27m contract to replace the roof on London's Grade 1-listed King's Cross station. And, in the nuclear sector, Kier has won a framework agreement with the Atomic Weapons Establishment that could lead to major infrastructure and building works over the next five years.

Support service work accounts for 16 per cent of group turnover and 15 per cent of pre-tax profits, and includes a high percentage of defensive business that's less likely to be hit by the UK's weak economy. Two-thirds of support service work entails necessary maintenance work. For example, Kier has recently been selected as preferred bidder for a contract to repair and maintain 16,000 homes for North Tyneside Council. The agreement, which will be for 10 years with a potential five-year extension, should be worth at least £600m. All told, Kier now looks after the maintenance of over 240,000 social homes.

The private housing side of Kier has suffered in much the same way as any other housebuilder. Selling prices in the third quarter remained under downward pressure, with management again highlighting the difficulties of raising finance for first-time buyers. That said, by the end of April, Kier had secured almost 95 per cent of its projected sales for the year, although in the current market there is a heightened risk of reservations being cancelled.

Business on the property development side has, predictably, been rather flat, although this part of the group accounts for just 9 per cent of pre-tax profits. However, Kier has just completed the conversion of London's Middlesex Guildhall, which will house the UK's new Supreme Court. It is possible that Kier may not keep the maintenance contract for the court building for its full term; in which case, City analysts believe a disposal would bring in around £25m to add to the group's net cash, which stockbroker Cazenove thinks will be around £80m for the year just ended.