• Mark Watson-Mitchell

Kier Group – on just 5.3 times historic earnings, a massive upside is offered

After an extensive restructuring this group is beginning to show some much rosier prospects.


The program also included debt reduction and a major cost-cutting and disposal exercise.


Harshly its Management also reduced the group’s manpower by some 1,700 employees, as well as selling off its public and private housebuilding operation.


That all happened to the UK’s second biggest contracting group hit some major snags in 2019 and 2020.


By last year it was leaner, healthier and had scrapped its way back into profitability.


The Business


Today the Kier Group (LON:KIE) is a leading UK infrastructure and construction services group.


It is able to provide specialist design and build capabilities and the knowledge, skills and intellectual capital to ensure it is able to project manage and integrate all aspects of a project.


It is a supplier to the UK Government with key strengths in the education, health and justice sectors, it is therefore well placed to benefit from increased UK Government spending.


The group has three main divisions – infrastructure services; construction; and property.

The infrastructure services division designs, constructs and maintains strategic and local road networks; repairs and maintains essential services to the water, energy, telecoms and rail sectors; and it manages high-value construction and civil engineering projects across a number of sectors including nuclear, roads and rail such as HS2.


The construction side is a leading UK national builder, providing project delivery for the public and private sectors including education, health, defence and justice, such as HMP Five Wells in Wellingborough.


The group’s property business invests and develops schemes and sites across the UK including industrial, offices, and mixed-use residential schemes.


Recent Trading Update


Ahead of a Capital Markets Day on 25 May, the day before the group issued a Trading Update for the period to 30 April this year.


The company stated that despite continuing inflationary pressures the group had performed well and ‘in-line’ with expectations.


It went on to note that the group had continued to win new high quality and profitable work and that at the end of March its order book was 6% higher than three months previously, standing at £8.5bn.


In remaining focused upon winning more business from long-standing client relationships its order book continued to be underpinned by significant long-term framework agreements.


The Group’s Medium-Term Value Creation Plan


The company’s management is confident of achieving its medium-term targets, which are:

  • · to see its revenue grow to £4bn - £4.5bn;

  • · that its adjusted operating profit margins would be some 3.5%;

  • · that it would achieve a cash conversion of operating profit of around 90%;

  • · that its balance sheet has sustainable cash and capacity to invest; and finally,

  • · that it was able to sustain a dividend of around three times cover through its medium-term cycle.

The Equity


There are some 446.23m shares in issue.


Larger holders include M&G Investment Management (9.93%), Abrdn Investment Management (8.97%), Ignis Investment Services (5.39%), JO Hambro Capital Management (5.04%), Brewin Dolphin (5.01%), Aviva Investors Global Services (5.00%), Charles Stanley (Investment Management) (5.00%), Rathbone Investment Management (4.93%) and Schroder Investment Management (4.75%).


Broker’s Views


The group is just days away from the end of its current trading year at the end of this month.


Analyst Joe Brent at Liberum Capital estimates that sales will have increased from £3.3bn to £3.4bn for the year, with pre-tax profits having grown to £95.3m (£65.4m), with earnings coming in at around 16.92p per share.


For the year to end June 2023 he sees £3.87bn sales, £107.2m profits and 19.02p per share in earnings.


The 2024 year could see £3.96bn sales, £118.7m profits, 21.07p earnings triple covering a restored dividend of 7.02p per share.


Liberum has a price objective of 150p for the shares.


Over at Peel Hunt, their analyst Andrew Nussey, has a ‘buy’ recommendation out on the shares, with a 200p price aim. He suggests that the company offers a clear strengthening of its investment case and the management medium-term goals.


He states that


“In an uncertain market, Kier offers a relatively safe haven, given long-term public sector investment commitments.”


My View


On Friday 22 July I would expect the group to be announcing its 2022 June year-end Trading Update.


At that time, I hope that we will see an even higher order book going forward and other good news from the group’s management.


A year ago, the group’s shares were trading at around the 133p level since when they have just been drifting off to a recent 67p low.


Now at 71p I consider that the shares, of the £317m market capitalised Kier Group, offer some significant upside as its management aims start to show through to fruition.


My Target Price is 90p, at which point they would be trading on an extremely lowly 5.3 times historic earnings – now that really is cheap!





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