Not all builders are making losses. David Holding looks at one company making headway in the current turmoil.
Construction group Kier (LSE: KIE) is one of the few companies in its sector that seems to be weathering the storm. But can it continue to do so?
The company clearly believes it can.
As you would expect, the shares have been a lot higher as this chart shows. They were two and a half times their current level not so long ago, but relative to its peers, that's a pretty good performance.
Glass half full
Today's interim results to the end of December show a operating profit down 41% on the year -- but still in-line with expectations. And the CEO's glass is clearly half-full as he looks to "take advantage of any [opportunities] presented by the economic downturn," for which we may read "buy businesses on the cheap".
Kier is a bit of a strange mix. Its origins date back to the early 1920s though today's company is the product of a management-led employee buyout from the Hanson Group in 1992. Unsurprisingly, its private housing and social housing contracting businesses have been worst hit, but this has been offset to a large extent by other areas of the business such as construction and support services -– which include, amongst other things, a new phosphate mine development in Saudi Arabia and an opencast coal mine in East Ayrshire.
Weathering the storm
If management can steer the company through the current storm successfully -- and take advantage of the weakness of others -- investors may be tempted in on a long-term balanced view of income and capital growth. After all, if the full year dividend of 55p is maintained -– and the interims give us no reason to think otherwise -- Kier is yielding a healthy 6%; rather better than the best deposit account and with optimism about the future to boot.
As I write, the shares are up a small amount on today's upbeat news to 916p, valuing the company at £339m. But with a net asset value of £189m, and £112.4m in cash, it’s easy to see that Kier is being shrewdly managed. Taking the second half alone, the shares are now trading on a price-to-earnings ratio of a little less than nine. In more normal times, this would be considered cheap, but in today's strange economic environment, it’s nothing to get overly excited about.
Credibility
Perhaps the difference with Kier is that investors can believe these figures going forward: "Judge a man not by what he says, but by what he does" as the saying goes.
After all, Kier tells us the outlook for construction and support services is positive, and that order books and probable awards together will account for around 80% of its revenue for 2010. The company remains cautious for the housing market but says that restructuring of its Partnership Homes division will reduce costs by around £20m a year.
Judged on previous performance, Kier will deliver on these promises. Investors looking for solid long-term income and growth should take note.
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