US Edition Kier Group
£12.77 +32p
Questor says BUY
Kier Group is confident that, because of the areas in which it operates, its future is bright.
In its construction unit, the group has work in place that will secure 93pc of forecast revenues. For 2010, it has contracts in place that will generate 50pc of expected revenues. This is very good visibility.
The group is also moving away from private house building and concentrating on social housing. This appears to be a good move.
John Dodd, Kier's chief executive, told Questor yesterday that although government spending will slow, the tap will not be turned off. He also believes that the group is active in areas where the spending is "non-discretionary".
The company is a major player in the academies framework and there are a number of school-building contracts available to be won this year. Also, the company has good exposure to the energy sector – and if the UK does not construct enough power stations in the next 10 years there is a real chance that the lights could go out, despite government claims that this won't happen.
Kier is already involved in building the West Burton combined-cycle gas turbine station which EdF is constructing in Nottinghamshire, and it has been involved in the construction of 14 gas-fired power stations in the last 15 years.
The group's support services unit is involved in the build, design and maintenance of social housing. Just two weeks ago, the company won a new maintenance contract in this area with North Tyneside Council. The £600m contract will run for 10 years but could be extended. The company is going to focus on this area of housing, rather than private
house building.
The group's full-year results reflected last year's market conditions. In the year to June 30, revenues dipped to £2.14bn from £2.37bn in the equivalent period last year. Pre-tax profits fell to £24.8m from £63.4m after land and property write-downs.
The group took write-downs of £49.8m but added back a £27.3m credit from its retirement scheme. Operating margins in the key construction division rose to 2.6pc from 2.3pc.
Reassuringly, the full-year dividend has been maintained at 55p. The final dividend payment of 37p will be paid on November 27 and there will be a scrip dividend alternative, although Questor would be inclined to take the cash.
New investors can still buy and bank the final payment, as the shares do not go ex-dividend until September 23.
The shares are up 42pc since they were recommended as a buy on March 11, and are now trading on a June 2010 earnings multiple of 12.3 times and yielding 4.7pc.
The stance remains buy, although gains are likely to be more pedestrian from here on in after the recent run up in the shares. However, the visibility is good and the rating remains undemanding.
Rolls-Royce
491.6p +10.1
Questor says HOLD
Rolls-Royce is a great British company. Its recurring revenue streams from its installed turbine base provide excellent cash flows – that's why Questor named its as one of the tips of the year in January.
This week's announcement that the group is going to be a significant supplier to French energy group EdF Energy is fantastic news for the company's future. Rolls-Royce has signed a memorandum of understanding with the French utility group to provide engineering and technical support for the UK's four new nuclear power stations. The group will also supervise and manage the supply chain, a very important role which is likely to include hundreds of companies.
The company is already an active player in the nuclear industry. It has developed reactors for Royal Navy nuclear submarines.
The shares plunged in the early part of this year as investors fretted over the prospects of cyclical companies. These fears were vastly overblown. The market has finally realised this and the shares have had one of the best runs in the FTSE 100 since their low in February – and the rating is now more reasonable. In fact, the share price has almost doubled since their nadir.
Rolls-Royce is now valued at a much more reasonable rating. They are trading on a December 2009 earnings multiple of 13.6 times. The dividend yield is 3pc.
Although the long-term prospects for the company are sound, Questor feels that the upside from here may be limited in the short term. Investors willing to put new money into the market could find prospects with higher potential upside over the next year or so.
Despite the current optimism, Questor is still cautious about market prospects and believes that a conservative investment strategy is the best way forward.
Rolls-Royce shares are up 43pc since their recommendation on January 5 and investors currently holding the shares should hold tight as a long-term holding.
However, after the strong run in the shares over the last six months and with one eye toward Questor's conservative investment strategy, the stance on the shares is now hold.