■ May Gurney acquisition completed
■ Strong order book
■ Debt to fall rapidly
Growth at Kier (KIE) is set to accelerate following the successful acquisition of May Gurney Integrated Services last month. Moreover, management expects both its construction and services divisions to pick up work, generated by the government's latest comprehensive spending review. The combined group will also benefit from having a broader revenue stream, with a combined order book in excess of £5.7bn - Kier is targeting a 15 per cent return on equity by end-2015, too.
Even without these plus factors, Kier has been performing strongly - a trading update this month revealed a £2.1bn forward order book in the services division. That provides long-term visibility, with 92 per cent of targeted revenue for the year to end-June 2014 already secured. On the construction side, the operating margin has remained steady at around 2 per cent and, despite the tough trading climate, Kier has managed to secure new contracts worth £1.4bn - that's enough to meet the entire targeted revenue for 2014.
Admittedly, buying May Gurney Integrated Services did turn an estimated net cash position of around £49m into a £150m net debt pile. But cost synergies, land sales and lower working capital requirements on the construction side are expected to reduce this significantly over the coming year.
Liberum Capital says…
Buy. Kier is overlooked due to its complexity and exposure to unfashionable markets, but it offers an attractive dividend and strong growth potential. If Kier delivers as we expect, then the shares have scope to rise to 1,500p. In fact, we see earnings per share growth potential of 97 per cent by 2017, which implies an EPS of 185p and a PE ratio of less than 7. We also feel that the benefits of the May Gurney acquisition have not been fully appreciated, and there are also targeted cost synergies of £20m - which looks very achievable. Expect adjusted pre-tax profit of £62.9m for end-June 2013, giving EPS of 128.9p, and £70.8m for 2014 with EPS of 100.2p.
Numis Securities says…
Buy. Kier has significant scope to outperform its rivals and the recent trading statement indicates signs of further improvement in both construction and services. We also believe that the May Gurney acquisition will add significant momentum to the group's growth profile. Before the acquisition we expected Kier to show a small decline in 2014 EPS, and a 14 per cent gain in 2015, but we have upgraded this to a 7 per cent rise in 2014 to 98.7p, and 22 per cent in 2015 to 120.5p - as Kier becomes the largest provider of maintenance services in the UK. Expect end-June 2013 pre-tax profit of £46m, giving EPS of 92.3p and a 66p dividend. Our price target stands at 1,670p.
