Kier's rebuild job almost complete

Contractor Kier (KIE) continues to make progress on what is still very much a turnaround situation, albeit one that is less precarious than it was. After a torrid couple of years both before and during the pandemic when the business was forced to take action to shore up its balance sheet – via two rights issues and the sale of its Kier Living arm – it is showing real signs of progress. 

Average month-end net debt has come down from £582mn two years ago to £232mn, with the remaining £50mn of a supply chain finance facility now paid off.

It has done this through much stronger cash generation as revenue and margins have improved, and free cash flow more than doubled to £132.3mn. Kier attributed this to a strong fourth quarter in its construction arm, which specialises in buildings schools, hospitals, prisons and amenities for local authorities.

The construction business grew full-year revenue by 15 per cent, although margins remained flat at 4.2 per cent. With reports of classrooms being closed and pupils sent home as concrete crumbles around them, this division stands “well placed to benefit from the UK government’s focus on spending to improve under-invested assets”, the company said. 

Revenue grew by 3 per cent in the infrastructure arm, where operating margin ticked up by 50 basis points to 4.7 per cent. Group-wide adjusted operating profit rose by 9 per cent to £131.5mn, but with fewer adjustments made as restructuring efforts wind down, both pre-tax profit and earnings per share trebled. 

No further restructuring charges are expected this year, and with meaningful progress being made on its debt Kier now has more cash to play with. It made an acquisition last week, buying the rail arm of Buckingham Group from administrators for £9.6mn, and after a four-year hiatus it plans to reintroduce a dividend with its 2024 half-year results.

Kier Group’s shares rose by 6 per cent post-results but still only trade at four times broker Panmure Gordon's forecast earnings of 21p a share. Analyst Adrian Kearsey thinks the shares will re-rate once dividends recommence given that its shares are priced well below peers. However, a report by The Independent that prime minister Rishi Sunak and chancellor Jeremy Hunt have discussed potentially ditching the second phase of HS2 adds to our concerns that an investment case based on a UK infrastructure boom may not be as solid as it appears. Move to hold.

Last IC View: Buy, 73p, 9 Mar 2023