MIDAS SHARE TIPS: Construction firm has plans that could build up profits

When the financial markets look uncertain, it pays to choose companies with focus and a plan. Construction and infrastructure services group Kierwhich released its interim results earlier this month, tries to show that it has both.

The company went through a major restructuring, cutting jobs, suspending dividends and losing some of its business, including housing. Kier is now focusing on two sectors: infrastructure and commodities. It has projects as diverse as repairing Scottish Water’s sewer network and restoring Oldham Town Hall.

Chief executive Andrew Davies, who oversaw the restructuring, says the company’s larger order book gives investors more visibility. It’s up 29 per cent to £10.1bn, with 96 per cent of Kier’s projected annual revenue already secured. Davies adds that 60 percent of the order book is cost reimbursable or ‘target cost’ contracts, meaning the company is less exposed to rising inflation in raw materials and labor costs.

Davies wants to reassure investors. His statement during the results was full of phrases such as “bidding discipline” and “risk management is now embedded in the business.” Should investors be reassured by his words?

Those with longer memories will remember why the company had to be restructured in the first place. When the current board took over, Kier had admitted “accounting errors” and was deeply in debt.

Davies described the company as ‘an absolute shambles’ in a newspaper interview, revealing it was on the verge of collapse before being bailed out by contracts related to HS2.

Analysts believe the restructuring has done much to strengthen Kier’s position. Joe Brent van Liberum points out that this is the third set of results in which the company has met or exceeded the company’s margin target.

Most predict a dividend from the group in 2024. Risks include delays in tenders and in secured projects such as HS2. Shares are down 26 percent over the past 12 months, though they’re up nearly 9 percent since January.

Midas verdict: The collapse of Carillion in 2018 sent shockwaves through the infrastructure world and exposed the cracks in the relationship between the government and the contractors who work for it.

Kier is still in debt and there are still concerns about the industry and Kier in particular. However, it is possible to see much further into Kier’s future than in previous years and things could look bright.

With Davies at the helm and a much more selective approach to contract bidding, the company’s valuation now looks undemanding. It trades at 3.7 forward gains, compared to an industry average of nearly seven. The return of the dividend should help inspire more confidence. To buy.

Traded on: Main market ticker: KIE Contact: kier.co.uk or 01767 355000