Kier has made more than 100 redundancies in the past six months as it reshaped its operations to focus the business on infrastructure and the south of England.
The fifth biggest contractor in the CNinsight 100 reported solid half-year results last week, with its property division pushing profits up 9 per cent to £34 million on revenue of £1.046 billion and with £131m in the bank.
But the results came with a warning of 18 months of margin pressure and a two-year wait for outsourcing rewards to come through as local authorities wrestle with their budgets.
Kier’s share price dropped 12.8 per cent in 48 hours as a result, to 1,298p per share.
The company is attempting to mitigate margin pressure by shifting focus - and staff. Other contractors in the top five have their own strategies - Carillion is shrinking its construction business and focusing on support services and overseas work, while Morgan Sindall is placing faith in the longer-term benefits of regeneration.
The past six months have seen Kier spend £2-3m on cutting its cost base through redundancies, reveals group finance director Haydn Mursell, with the number expected to reach up to 150.
That tough climate means continual self-examination is required for Kier to be a £2.2bn construction, services and property firm, Mr Mursell says.
Within that is a £1.5bn construction business, spread evenly with a third in infrastructure and overseas, a third in UK frameworks and a third in the open market.
Taking that shape has meant redeployment of some of its 10,128 UK staff - including from the North to the South and from building to infrastructure, where lifestyle and skills allow.
Mr Mursell explains: “We don’t see the construction revenue declining in terms of the volume of the business - that should be pretty stable now.
“There will still be mobility changes and that often means that we end up with a few redundancies, but we don’t see any major redundancy numbers in the next six months.”
“We are seeing UK margins in open market tenders coming under quite severe pressure; the work we have in frameworks - which makes up 60 per cent, is still okay - but a framework owner is still going to slightly take advantage of the current market and seek more value out of these frameworks.
“But the frameworks are still better than the open market. What we are seeing is more activity in the South and London, rather than the North, and what we are trying to do is move people between sectors.”
Kier more than halved its overseas staff in 2009/10 to 557, but now plans to increase revenues to £150-200m, or 10-15 per cent of its market, in areas including the Middle East, Hong Kong and Jamaica, where in many cases it will look to form joint ventures with local contractors while upskilling and offering training. Only a handful of employees have moved abroad so far, he says.
The FD - formerly deputy group finance director at Balfour Beatty after seven years at Lend Lease - joined Kier in August 2010, coming right as the eurozone crisis hit customer confidence, banks and investors and homebuyers.
While Kier is in a strong financial position, Mr Mursell says that with funding “scarce” it is a particularly important time to be supporting the supply chain. “Where a bank does want to lend, it will be pricey,” he says.
“From a supply chain point of view, just because of the nature of the environment we are in, they are struggling.
“We have a pretty good list of preferred supply chain partners and are conscious that some peers might want to stretch their supply chain to the point of snap. That’s not where we want to be.”
This means keeping good credit terms with suppliers, being flexible on the 45-day payment period, and providing enough volume to “keep them above water”, Mr Mursell says.
“While that means our cash position takes a bit of pressure, we would rather take that and get the job done properly.”
Kier’s strong cash position also gives the company time to be selective about acquisitions. It is particularly interested in purchasing in the FM sector, preferably a private firm.
“We can offer integrated services but it is South-biased so we need a greater national presence, which will at the same time give more skills to the service offering.” He adds: “If we find a deal that gives us all these ticks, then we might look at using some equity deal.”
Part of Kier’s refocus is on expanding infrastructure, after significant wins with Crossrail and Hinkley Point.
With pension funds keen on stable long-term returns, Mr Mursell says there needs be “risk acceptance” from the government to entice investment.
“If the government is happy to take the construction pricing risk, then I think some of the contractors will come to the party and offer some funding; we would offer some sort of funding to get something built.”
The dilemma is exacerbated by the eurozone and UK debt crisis, with private developers not being able to get funding at the moment, he said.
Kier is also a major player in the private finance initiative market, where the risk is priced into the contract. “I imagine PFI will come out in a different guise in the nearish future, because the government will not be able to get projects under way otherwise,” he says.
A share of profits between private and public is likely to form a part of that, Mr Mursell predicts, while also highlighting the importance of the secondary market to recycle capital.
Responding to MPs’ criticisms of the lucrative secondary market, he points out that it is the main incentive for entering into a PFI.
In the open market, chief executive Paul Sheffield estimates that half of tenders are still biased towards cheapest price.
He says: “For other people who don’t have the infrastructure and frameworks, I think it could well be 50 per cent (of tenders). I should think we are down at the 10 per cent level.”
He adds: “The only thing we can do there is be quite choosy about what we bid and not get caught up in a race for cheapest price on difficult projects that are going to cause problems.”
Despite a hands-on approach from both Mr Sheffield and Mr Mursell on projects down to £25m, forecasts suggest construction margins will drop just below 2 per cent.
Kier’s strategy could mean further dents to its share price in the short term, according to Investec analyst Andrew Gibb.
He says: “We continue to like the Kier business model and its exposure to infrastructure - particularly the energy sector - and growing services offering.
“The asset base does continue to support the equity valuation, but clearly in the absence of positive catalysts and the current direction of numbers, sentiment will be against this stock in the near term. We therefore put our recommendation and target price under review.”
Fellow analyst Howard Seymour of Numis Securities predicts that next year will be the “nadir for construction”, while the view on support services “reflects only a delaying of expected increased activity”.
“We continue to argue that the refocusing of the business remains the key driver of the group, and even with the target price reduction see the shares as offering good fundamental value.”
Kier’s latest results
- Overall results: £34 million of pre-tax profits, up from £31.3m last time, on revenue of £1.046 billion, down four per cent on £1.097bn Cash held stood at £131m
- Construction margin 2.5 per cent, down slightly on the 2.7 per cent recorded last year, with £720m revenue (2010: £728m) and £17.8m
- of profits (2010: £19.8m)
- Service margin was flat at 4.5 per cent, with revenue down from £243m to £218m and profits dropping from £10.9m to £9.8m
- Property - including development, PFI and homes - profits trebled, from £3.4m to £10m, on revenue of £108m (2010: £126m)