Anyone who has walked past a building site in the UK recently might well have seen Kier (KIE) branding on it. This infrastructure and construction services outfit is actively at work on more than 400 developments across the UK. Having emerged from a difficult period with much stronger foundations, this improvement is not yet reflected in its current valuation, but we think that will change through the course of 2025.

The business, which employs 10,000 people and has been going since 1928, has four divisions: Transportation, Natural Resources, Nuclear & Networks, Construction and Property.

Transportation designs, builds and maintains infrastructure for several sectors including highways, rail, aviation and ports. Natural Resources and Nuclear & Networks provide repair and maintenance services and support for large capital projects in the nuclear, broader energy and telecoms industries.

Construction delivers private- and public-sector projects, including in areas like education, healthcare, prisons and defence, while the Property division invests in and develops mixed-use sites encompassing residential properties, urban regeneration, last-mile logistics and office developments.

PUTTING PAST PROBLEMS BEHIND IT

Like several of its peers in the construction and contracting space, Kier has endured problems in the past thanks to a lack of discipline when bidding on projects which left it saddled with loss-making contracts.

Between 2018 and 2020 this resulted in significant strain being placed on Kier’s balance sheet and the company having to go cap in hand to investors. However, a subsequent focus on simplifying the business and managing contract risk more carefully has helped drive improved cash generation and seen a significant reduction in the company’s liabilities. The company actually finished its financial year to 30 June 2024 with net cash of £167 million (excluding leases).

While this is obviously just a snapshot of the financial position, average month-end net debt halved for the 12-month period to £116 million. This was supported by an appreciable uplift in free cash flow in the year to £186 million, which also enabled the company to put money to work in the Property division where it targets a return on capital employed of 15%.

Around 90% of Kier’s contracts are with the public sector and regulated companies, and this means it is well placed to benefit from renewed investment in UK infrastructure including areas such as energy, water, transport, defence, education and health.

Kier’s recent contract awards include a £100 million contract to replace hangars, office buildings and a training school at Royal Naval Air Station Culdrose and work as part of Wessex Water’s planned £3.7 billion spending programme.

The company also looks well-positioned to benefit from the new Labour Government’s push to boost housebuilding and bolster infrastructure spend. An order book which totaled £10.9 billion at the last count already provides good visibility on the current financial year and beyond.

These factors should, in turn, help underpin the company’s medium-term ambitions. Through to 2030, these include growth above GDP through the economic cycle, 3.5%-plus adjusted operating profit margins, 90% of operating profit converted to cash, average month-end net cash (with surplus funds reinvested) and a dividend three times covered by earnings.

A DISCOUNTED VALUATION

Margins are skinny in this sector, as the medium-term target indicates, however this is more than reflected in the valuation which stands at just 6.9 times forecast earnings for the 12 months to 30 June 2026. The forecast yield also looks attractive at 4.7%.

We think as Kier delivers on what looks like a sensible and fairly conservative set of full-year targets, the market will re-rate the shares. A 14 November trading update revealed a strong start to the current financial year and we would expect the momentum to be maintained through the course of the next 12 months. 

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