VALUE INVESTING
Kier Group

By Stephen Bland (TMFPyad)
August 18, 2000

After a respite last week when I reviewed the performance of the nine shares on which I had written over the last few months, I continue with the individual company value analysis this week. As I usually comment, readers should note that these shares are not likely to be the sort of very deep value shares in which I personally prefer to invest, because there are simply not enough of them, but nevertheless I see them as being strong value play candidates, depending on how each investor rates her personal criteria within the value discipline. In fact, most value investors do not insist on criteria as tough to satisfy as I do. Yet just as much money can be made, I believe, with the correct attitude, from far less deep value shares.

Interestingly, construction shares feature yet again this week as I take a look at Kier Group (LSE: KIE). Over the last few months of the current series of articles this sector has figured strongly with two of the nine shares being in the industry. No accident, of course, because the whole construction sector has been trading on extremely low ratings despite many of the constituents having very positive earnings per share (EPS) forecasts.

As I have written, this is because the predominant view of the market is that the sector is around the top and it does not trust the very bullish outlook that appears to be the case with many construction shares. There are good reasons for these fears because construction is an immensely cyclical sector. In a time of even mild recession construction projects are amongst the first to get the chop. Hence construction companies are not normally amongst those that demonstrate a nice steady EPS growth curve over a period of years, the line bearing more resemblance to a profile of the Himalayas.

The value player of course is betting that the market has got it completely wrong.

Here are the usual fundamentals, most figures from the year ended 30 June 1999

• Share price 276p
• High/low this year 327/226
• High/low last five years 327/184
• Market cap £90m
• Earnings per share year ending 30 June 1999 30.2p
• Earnings per share year ending 30 June 2000 37.4p (forecast)
• Earnings per share year ending 30 June 2001 43.6p (forecast)
• Price/Earnings ratio historical 9.1; on 00 forecast 7.4; on 01 forecast 6.3.,/li>
• Yield on historical dividend of 9.3p 3.4%; on 00 forecast 3.7%
• Price/Book 2.7
• Gearing -124% (i.e. net cash)
• One year relative strength -2.7% (i.e. negative)
• Directors own 6.6% of the shares
• Institutions own 19.0% of the shares

A lot of these figures are rather out of date because the last full year end published was for 30 June 1999 and we have had another financial year terminate since then, but the figures are not out yet. They should be published next month, so anybody considering the share may be advised to wait until the latest data is available.

The yield is modest for a value share, but is at least 50% over the FTSE 100 average.

In the last report to June 1999 the turnover was split 89% to general construction and 11% to residential and other property. Interestingly, the former generated 55% of the profit and the latter 45%, reflecting I expect a strong housing market, but as I say that information is rather old now.

However on 17 July 2000 the chairman commented that "our markets remain stable and there is a lot of confidence in all of our businesses that progress will be continue in 2001 and beyond." This is reasonably positive.

Recent news on the company includes an announcement a few days ago that it has won a contract to construct a new hospital in Reading, a £25m project as part of a consortium.

Keir looks good to me, provided investors are willing to take a continuing contrarian view on the construction sector. Sooner or later the sector will turn down as the natural cyclicality of this high-risk and often narrow margin industry re-asserts itself. But value as I see it is a fairly short-term game anyway, so the idea would be to exit long before that happens, typically whilst everything still looks rosy and some decent rise has occurred in the share price.

By the way, always take forecasts more than one year out much less seriously than the current year, which itself is essentially unreliable unfortunately, but it's all we have.

For what it's worth, three brokers in reports issued in the last few weeks, one of whom is the house firm, rate the share a buy. Some may consider this a negative feature, of course. Sometimes it can be, others perhaps not. You have to judge whether you consider this to be a contrarian indicator.

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