■ Almost all full-year construction revenue already secured
■ Solid pipeline of affordable housing contracts
■ Cash pile expected to recover
Kier (KIE) operates three divisions - construction, property and services - and, while all three have performed well so far this year, the group is conducting a further review into the construction side as a result of the difficult trading conditions.
Even so, a trading update last month confirmed that the construction division has won new work worth £400m since July, mainly through existing framework agreements. Moreover, the group's £2.1bn of secured and probable work represents 98 per cent of forecast construction revenue for the whole year to end-June 2013. Meanwhile, profit margins, while still under pressure, are in line with expectations. On the property side, new work secured includes a £240m contract to develop the Watford Health Campus, while further successes with mixed-tenure affordable homes has built up a pipeline of work worth over £300m. Services work has been harder to secure as a result of lower public sector budgets, but there is still a £2.1bn order book providing revenue visibility beyond 2020.
While net cash by the end of this month is expected to have fallen by around £100m from the £129m reported in June, property transactions scheduled for the second half of the financial year are expected to bring net cash back to around £129m.
Numis Securities says…
Buy. The share price has been adversely affected by a warning on trading conditions from Balfour Beatty. But Kier has confirmed that its trading remains in line with expectations and that both the support services and construction operations have already secured almost all of their projected revenue levels for the whole year. In construction, selectivity in the UK coupled with major project wins and overseas awards are key drivers. And, while profits from the property business are expected to be lower, this is more of a timing issue reflecting property disposals. Expect adjusted pre-tax profit of £64m for 2013 and EPS of 131.9p (from £70m and 147.6p in end-June 2012).
Investec Securities says…
Buy. Given the tough trading climate, Kier's trading statement is reassuring, with both profits and cash levels expected to hit expectations for the full year. The construction market is unlikely to improve in the near term, but, given the group's exposure to a steady revenue stream from framework agreements and a decent level of forward visibility, we expect Kier to manage its way through. We have a share price target of 1,500p - this partly reflects our belief that Kier is in a strong position to protect both margins and cash generation. We therefore regard recent share weakness as a buying opportunity. Expect a dividend of 67p for 2013.
