Investment Column: Kier's foundations keep it on firm footing

Cobham; Booker

Nikhil Kumar
Friday 16 September 2011 00:00

Our view: hold

Share price: 1,189p (+65p)

The grim economic outlook does not bode well for companies that operate in the construction market. The sector was deeply bruised by the recession, and another contraction in the economy would no doubt weigh on business.

Kier, the construction, house-building and contracting firm, has, to its credit, managed to come through the slump rather well, drawing strength from the diversity of its operations and sound strategic moves.

This was reflected in its results yesterday, when it revealed that underlying pre-tax profits had climbed to nearly £70m in the year to the end of June, up from £55.5m in 2010. The full year dividend was up by 10 per cent, while construction margins improved and services margins remained stable.

The business also showed off a four-year framework worth up to £1bn from Scape, a local authority-controlled company. As sole contractor, Kier estimated that the deal will see it "carrying out over 2,500 projects valued at under £500,000 and over 350 projects valued between £500,000 and £2m."

In another spot of good news, the results showed that Kier had managed to reduce its construction arm's dependence on the public sector – although it remains chunky at more than 50 per cent. Offsetting this, however, were Kier's comments that it expected the "proportion of public sector work drop to less than 50 per cent over the next year".

Turning to the shares, we had been buyers until November last year, when we opted to revise our view to hold. At the time, the stock was changing hands at 1,259p. Since then, it has fallen back, though not by much, trading at around 1,200p nowadays. The decline is likely to have been prompted by the broader economic picture and concerns about the prospects for construction-related companies.

But the fact the pullback has been limited reflects, in our view, Kier's strengths, which were evident in yesterday's results. The valuation – the stock trades on under 8 times forward earnings – is also supportive. These factors argue against selling. The gloomy mood in the markets, however, argues against buying at this point.


Our view: hold

Share price: 180p (+0.5p)

Cobham, the aerospace and defence group, is an innovative company working in a difficult market.

Best known for its heavy aviation engineering, the company produces pipes and other devices for the oil tankers used to refuel the RAF aircraft flying to Libya and the bomb racks used in Boeing's F15E jets.

And, in a particularly inspirational bout of innovation, Cobham recently developed a piece of equipment that uses a "ceramic membrane" to generate oxygen from the air. This enables army field hospitals to operate without the need for a constant supply of fresh compressed oxygen tanks, free from the worry about an explosion.

Yesterday, it agreed to buy California's Trivec-Avant Corporation, a maker of satellite antennas for transport and logistics companies, for $126m (£80m), with an additional payment of up to $18m if it performs really well. It also announced a new $60m contract to supply an aerial refuelling pod for the KC-390 tanker aircraft being developed by Brazil's Embraer.

Overall, Cobham appears to be doing everything right and its first-half results were encouraging. The trouble, however, is that about 70 per cent of its sales come from military customers at a time when many countries, including Britain and the US, are significantly cutting budgets as part of severe austerity programmes.


Our view: buy

Share price: 74.55p (+5.45p)

We've been buyers of Booker since November last year, when the shares were worth around 53p. The investment in the cash-and-carry wholesaler has, we are pleased to say, worked out well. So, is it time to bank profits?

Firstly, yesterday's results showed that the business remains strong, with total sales in the twelve weeks to 9 September rising by "7.6 per cent on the same period last year". Total sales in the 24 weeks to 9 September were up by 8.5 per cent.

Booker also said that, in India, its Mumbai branch was trading well, and that it was gearing up to open an outlet in Pune next week. Mumbai will see a second branch in December.

The strong trading performance, and the international expansion, makes us think that the stock offers scope for upside gains. No need to sell.

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