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Should you buy this Carillion competitor after today’s 15% surge?

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When the banking crisis set in, the rot quickly spread to the entire sector. And though there’s a risk of something similar in the outsourcing and construction industry, it’s not endemic and I see some solid performers there.

One is Keir Group (LSE: KIE), which released a full-year trading update Thursday that boosted its share price by 15% to 145p. The firm’s “two-year portfolio simplification programme” is now complete, and trading has been in line with expectations.

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At 1,130p, Kier shares are currently trading on a forward P/E of a very modest 8.4 with a 10% rise in EPS predicted for the year to June. That would drop even further, to 7.5, based on June 2019 forecasts, so why so low?

Debt

The overstretched debt problem that killed off Carillion must weigh heavy on investors’ minds, and Kier is carrying debt too. By full-year time at 30 June, net debt had risen to £110m, from £99m a year previously. And we now hear that the firm’s continued investment in its Property and Residential divisions has let to a further rise in average net debt.

But with Kier’s capital investment in those businesses having reached its desired level, the company expects to report a net debt/EBITDA ratio of under one by 30 June 2018. I don’t see that as any cause for concern, and I’m buoyed by Kier’s expectation for its “average net debt position to reduce over the period to 2020.”

The low valuation of Kier shares doesn’t seem to be a result of the firm’s dividend, which has been strongly progressive since a return to EPS growth in 2015. From a yield of 3.9% that year, it rose to 5.5% last year, and there’s a decently covered 7.1% on the cards for the current year with a further hike to 7.4% next.

I see reasonable earnings growth in the coming years, coupled with strong and reliable dividends. 

Banking upstart

I expect the banking sector to do well over the next decade, with smaller banks enjoying a rare opportunity. The big banks are still hurting from the financial crisis and from Brexit, and there’s a big pool of domestic demand that the little ones can expand into.

On Thursday Close Brothers Group (LSE: DBG) told us its first half has been good so far “with all three divisions ahead of expectations.” Its banking division has, in particular, “continued to generate strong returns and profit growth,” while interest margins have remained stable.

A 7.3% growth in the bank’s loan book year-on-year looks good too, with bad debts remaining low as the focus remains on its Premium, Property, Motor and Asset Finance businesses. Asset management is going well, with assets under management up 8.2% to £9.6bn.

Forecasts to improve?

The earnings rises of recent years are actually forecast to flatten out this year, but I can’t help seeing that as unduly pessimistic and I wouldn’t be surprised to see it revised upwards after first-half results are released on 13 March.

Dividends are also rising, with yields of 4.3% and 4.5% expected this year and next, and they’d be more than twice covered. I see a safe cash cow.

Close Brothers shares have doubled in the past two years, to 1,532p. But with forecast P/E ratios still only around 11 and under, and coupled with those dividends, I rate the stock a buy.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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