Kier

Description

Kier is an infrastructure maintenance provider, regional builder, developer and housebuilder that generates most of its revenue in the UK.

Kier has been through a significant period of transformation over the past four years, involving two major acquisitions and a portfolio simplification process. The company has now achieved an attractive balance between cash-consumptive / asset-intensive property activities and cash-generative / asset-light construction and maintenance activities. It services clients from both the private and public sectors that operate in industries such as education, transport, defence, residential and infrastructure.

We introduced the company in the Woodford Income Focus Fund’s portfolio in March 2018 and, a few months later, in August, Kier also became part of the Woodford Equity Income Fund.

Investment case summary

We were initially attracted to Kier by its compelling valuation and the strong synergies that exist between the company’s four business divisions. Kier generates over 90% of its revenues from the UK and has the capability to invest in, build and maintain any of the country’s principal physical assets – buildings, infrastructure and housing.

Its largest divisions, based on revenues, are the construction business (which places Kier in a strong position to address the UK’s needs for more schools, hospitals and transport infrastructure) and its services division (through which Kier is the UK’s market leader in highways maintenance). Meanwhile, its property arm develops projects nationwide, such as offices and retail and leisure spaces, mostly outside of London. Also, its residential business operates a hybrid model of building private houses as well as mixed tenure properties. There are strong synergies between its divisions which enable Kier to provide both capital-intensive work and maintenance services to fulfil the UK’s growing construction and infrastructure needs.

Having achieved an appropriate balance between its operations, Kier is now a cash generative business with robust long-term growth prospects, that pays an attractive dividend which is well covered by its earnings. Its share price, however, has increasingly undervalued these qualities.

Ask a question about our investment in Kier

Fund exposure
Income Focus Fund 2.73%
Equity Income Fund 1.02%

As at 31 October 2018

Segmentation
Geography United Kingdom
Industry Industrials
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

Rights issue

Kier has today announced that it is raising a net £250m through a rights issue to proactively reduce debt on its balance sheet. This is in response to deteriorating sentiment with respect to debt in Kier’s sector and the resultant desire of commercial banks to reduce their exposure to the construction industry. Importantly, Kier’s financial position and operational performance have not changed and trading is in line with expectations.

Following this fundraising, Kier will have a stronger balance sheet which management believes will improve the company’s competitive positioning, putting it in a better position to win new business, given increased focus on balance sheet strength by key customers.

Kier is a relatively new position in the funds and, with current trading in line with expectations and in anticipation of a stronger balance sheet and growing earnings, the attractive long-term investment thesis that we have built around it remains in place.

Alex Correia
30 November 2018

Good set of results and positive management meeting

A few days ago, Kier reported a good set of full year results, which were very much in line with management expectations. In numbers, revenues were up 5%, operating profits increased by 10%, earnings per share grew by 9% and its dividend was also up 2%. It also announced a new cost savings target of at least £20m in 2019 – this should further boost the company’s earnings going forward. Additionally, Kier has committed to deleveraging, including a target of a year end net cash position by 2021.

Also, we had a reassuring meeting with management today, which plans to substantially enhance the company’s cash generative capabilities. Additionally, its earnings from highway maintenance can grow significantly from here as its main customer (Highways England) is planning to double its spending on such services. Overall, the company’s outlook remains very encouraging as there is clear evidence that there is strong demand for Kier’s capabilities. We remain therefore confident in the investment case in this undervalued but very attractive business.

Alex Correia
26 September 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2018 Woodford Investment Management Ltd.
All rights reserved.

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