Investors in construction company Kier (KIE) have been worrying about the fallout from the collapse of outsourcer Carillion (CLLN) for over a week now.
Kier’s trading statement has gone some way to reassure its investors judging by the 10.1% uplift in the share price to £10.54, topping the list of FTSE 250 risers.
The company states it has traded in line with expectations in the six months to 31 December, with its return on capital employed targets being hit for its property and residential divisions. It also reports that operating margins have been maintained in its construction and services subsidiaries.
While the company’s net debt position has increased ‘as anticipated’ during the period due to investment in its property and residential business, it expects the figure to come down by 2020.
The net debt figure was about £350m at 31 December last year, a £50m increase on 2016 including £24m of costs and debt stemming from the acquisition of infrastructure services provider McNicholas.
However, the company stresses that its debt is underpinned by around £500m of property and residential assets. It will be less than one-times its earnings before interest tax depreciation and amortisation by June this year.
CARILLION EXPOSURE NOT AN ISSUE
One of the major headaches caused by Carillion’s demise is what would happen to the joint ventures Kier was involved in with the stricken company.
Kier has reassured its investors by informing the market that it and French construction company Eiffage have taken over responsibility for the HS2 joint venture.
The company is also taking full responsibility for the smart motorways contract it had been working on with Carillion for Highways England.
The company’s chief executive Haydn Mursell says ‘We have leading market positions in infrastructure services, building and development which provide the platform to support further growth and position the group well for the future.
'The group remains on course to deliver double digit profit growth in the current year and to achieve its Vision 2020 targets’.
Broker Numis gives Kier a ‘buy’ recommendation with a £15.10 price target, implying 43.3% upside. Using its forecasts, Kier trades on nine times 2018’s 117p of earnings while paying a 6.9% dividend yield.
Numis says ‘Reducing net debt should give investors confidence that debt increases to date are purely a function of discretionary asset investment as part of the Kier business model.
'This clearly illustrates that there are no trading or balance sheet parallels to Carillion, so recent share price weakness is misplaced’.
