Share-tips: A bumper order book and yield

published 20 April 2012

Kier (LSE: KIE), rated a BUY by Peel Hunt

Kier boasts a pretty broad portfolio. It includes construction (47% of profits), services (26%) and property (27%), straddling projects such as airports, schools, prisons, hotels, residential housing, wind farms and shopping centres. While its activities are largely focused on Britain, it has some exposure to Hong Kong, the Middle East and the Caribbean.

Kier has a solid balance sheet (net cash of £131m), a 5.5% yield and a £4bn order book. By this year's interims, the construction division had already secured all of its targeted revenue for the year ending June, and 68% for 2012/2013. In services, the figures were equally impressive at 95% and 76% respectively.

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Kier continues to win new work. In energy its 50:50 joint venture has bagged a £100m contract from the Hinkley Point C atomic power station in Somerset. Meanwhile, in September it was appointed as sole contractor on the government's four-year £1bn Scape National Minor Works contract. The firm also sealed a £50m deal to build a new energy-from-waste plant in Plymouth, and signed £210m of joint-venture work to refurnish Farringdon train station.

Other opportunities are on offer in facilities management, which involves maintaining buildings for landlords such as Legal & General. The company is also well placed to benefit from future government outsourcing in areas such as waste collection, street cleaning and highway maintenance.

The chief executive, Paul Sheffield, has said that the "next 18 months will remain challenging", and the chairman, Phil White, anticipates "greater pressure on margins", adding that "outsourcing is taking longer to come through, and is often reduced in scale". Yet Kier has an excellent track record of defending profitability via very strong relations with key customers, even in the most austere of times.

The City is forecasting 2012 sales and earnings per share (EPS) of £2.2bn and 148p respectively. That puts the stock on a price/earnings ratio of less than eight. However, I value the stock on a seven-times EBITA multiple. Adjusting for the cash pile, £30m of public finance initiative projects and a £29m pension deficit, that delivers an intrinsic worth of £15 a share.

The next trading statement is due out on 17 May and Peel Hunt has a target price of £18.19.

Rating: BUY at £11.30 (market cap £440m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI , or phone 020- 7633 3634 for more details.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.