Kier shares tipped to keep rising

Our own companies analyst's confidence in Kier was justified by today's results. Graeme Evans explains why the share price recovery remains on track.

The tug-of-war over heavily-shorted construction stock Kier is continuing to  captivate the market, with today's annual results helping to shift momentum away from those still making Carillion comparisons.

Kier's supporters include Neil Woodford, whose Investment Management fund last month doubled its stake in the high-yielding stock to more than 10%.

Our own Edmond Jackson also tipped Kier as a speculative buy in his Stockwatch column on Tuesday, citing the company's strong fundamentals. Investors who followed Edmond's advice would now be sitting on a 4% gain after Kier's results pleased and reassured the market with profits in line with expectations.

• Stockwatch: A contrarian play that's 'simply too cheap'

There are plenty of analysts who share Jackson's optimism, with Liberum and Peel Hunt both holding target prices of 1,600p. Numis Securities and Stifel are at 1,510p and 1,350p respectively, compared with the current 1,074p.

The company's current valuation certainly appears undemanding, based on a projected price earnings (PE) multiple for June 2020 of 6.3x, with a 7.3% yield.

In the other camp, however, are the hedge funds and other speculators who have made Kier one of the most shorted stocks on the market. More than 10% of shares are out on loan, amid scrutiny on the company’s debt position.

In particular, their focus is on the average net debt figure, which increased to about £375 million in 2018 from the £320 million seen a year earlier. Kier said this was driven by the timing of investments and the acquisition of McNicholas, adding that it was focused on reducing the figure to about £250 million in 2021.

It will achieve this through non-core disposals and its Future Proofing Kier strategy, which aims for cash flow improvements of at least £20 million in 2020, representing 10% of profits from operations.

This efficiency drive under the leadership of chief executive Haydn Mursell appears to have won over many investors, particularly as the company's current trading performance has also been reassuring.

Kier increased underlying revenues by 5% to £4.5 billion and earnings per share by 9% to 116.7p in the year to June 30, while also reporting a record order book from the Construction and Services divisions worth £10.2 billion. This includes extra work on smart motorways and HS2 following the collapse of joint venture partner Carillion earlier this year.

In addition, Kier's property development and residential arms have pipelines worth £3.5 billion, amid strong performances from the divisions this year.

Peel Hunt today increased its target for 2020 group profits by £20 million to £200 million to reflect the Future Proofing Kier initiative, adding that average net debt should reduce to £325 million by then.

Analyst Andrew Nussey said:

"As investors appreciate the underlying momentum, the attractive end-market positioning and the potential for faster deleveraging we see material upside."

Today's full-year dividend was increased by 2% to 69p as the company continues to target 2x earnings cover in 2020. 

Stifel analysts said the attractive dividend yield helped to underpin their investment case. They added:

"We view Kier as an attractive investment proposition, given our expectation of improving earnings quality, a step-up in cash generation and reducing leverage."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.