Kier pursues prudent strategies as uncertainties multiply

Kier Group (KIE) is still busily engaged in a spot of housekeeping, so shareholders will have to wait a little longer for the restoration of dividend payments. Nevertheless, there are signs that the ongoing restructuring is having the desired effect. A focus on debt reduction, in tandem with a capital raise and the £110mn sale of its housebuilding business, Kier Living, resulted in a reduction in average month-end net debt from £432mn to £216mn. The group undertook a £29.3mn repayment of its supply chain finance facility and has repaid the remainder of its £50mn facility post period-end.

Efficiencies aside, the top-line contracted slightly due to the general fall away in construction activity, while reported profitability was constrained due to £40mn in restructuring costs, along with a £6.7mn stemming from redundancies under the cost-saving programme. But despite reduced unit profitability within the infrastructure segment, the adjusted group operating margin increased by 70-basis points to 3.7 per cent.

All of this points to a more streamlined operation and management is also eschewing contracts with a higher risk profile, instead prioritising work with government agencies and blue-chip customers. And the group has certainly been making headway on the new-business front, evidenced by a 27 per cent increase in the forward order book to £9.8bn, with contract-wins across all its divisions. The new order intake is insulated to a degree against rising prices in the economy, with roughly 60 per cent in target reimbursable or cost reimbursable contracts. There is improved top-line visibility with the order book amounting to 85 per cent of this year’s revenue target. Highlights for the year included a £560ms deal to conduct highway maintenance work and services contracts for North Northamptonshire and West Northamptonshire Councils, together with contracts worth around £900mn for HM Prison Service.

Trading has been solid post period-end and Keir is well positioned to benefit from the government’s pledge on infrastructure spending, although it’s conceivable that commitments linked to the green energy transition may be tailored if ministers prioritise power grid reliability once winter bites. The focus on more predictable revenue streams seems prudent given the deteriorating macroeconomic backdrop.

Kier trades at a 33 per cent discount to net assets and at a lowly 4 times FactSet’s adjusted consensus earnings. Most of the heavy lifting has been done on the restructuring front, but concerns linger over issues linked to project execution, while statutory margins remain painfully thin in an inflationary environment. Hold.

Last IC view: Hold, 85p, 09 Mar 2022