Kier Group PLC

Introduction

The purpose of the report is to interpret the financial performance of Kier Group Plc using the annual reports and consolidated accounts of 2020, 2021, and 2022. The firm reported its year-end on June 30 of every year.

The firm applies the international financial reporting standards established in June 2003. The standard replaced generally accepted accounting principles. They have been used over the years and have proved effective as they enable the firm to compare its performance across periods and other firms in the same industry. Thus, there is consistency across different periods. Kier Group Plc has been selected since it is large enough and operates within an industry where firms have several segments for diversity purposes.

For the firm to post positive stakeholders’ value, Kier Group Plc established the following drivers in 2021.

• Selective disposal
• Increase in positive customer relationship
• Continued improvement in operations through eliminating areas that post-loss, selling firm properties to reduce debts.
• Re-posting the existing business for growth through high-quality earnings sectors of infrastructure management.
• Promotion of programs that are environmentally friendly through the application of different methods of construction.
• Employee training has also been significant in delivering sustainable health and safety measures.

Company Background

Kier Group Plc is a publicly traded company in Britain that carries out construction, property, civil engineering, and infrastructure services. The firm was established in 1928 in Stoke, where it initially majored in concrete engineering. Later it expanded into house building and general contracting. The firm was acquired by Beazer under Hanson Plc in 1986. However, the acquisition lasted only a short time since the management bought it out to expand its housing business in 1992 (Kier, n.d).

In the early 21^st century, Kier Group Plc expanded by acquiring other firms after the collapse of Carillion Plc. Currently, Kier Group Plc is ranked the second largest UK construction contractor, while the leading firm is Balfour Beauty. The firm was initially a constituent of the FTSE 250 index. However, in late 2018, after a failed right issue, the firm experienced deep losses in mid-2019, which most analysts considered was on the verge of collapse (Kier, n.d). Nevertheless, the firm was able to restructure its loans, sell its headquarters in Bedfordshire, and release over 1700 employees who saw a turnaround by reporting a profit in 2021.

The firm is currently ranked the second largest in construction in Britain, with a market capitalization of 326.186M pounds.

Since 2018 and 2019, the firm has focused on restructuring the firm when there is a loss-making segment and selling it from the firm. During this period, they create strategies that would enable the firm to grow in a different direction and ensure no burst due to investment in multiple areas contributing to the loss.

The following strategy is aimed at profitability past the losses of 2018 and 2019.

• Selection of projections that the firm can deliver and that will increase the profit of the firm. Through sampling, the firm can carry out a feasibility test and determine through the client’s needs whether the firm can deliver with the available resources. Thus, opportunity cost is an essential tool in such projects.
• Develop integrated solutions usually tailored to the customer’s needs since the firm’s leading service is construction, maintenance, and infrastructure services.
• Instruction and selection on constructions on the high capability of the firm for long-term projects

Business activities

The firms’ activities have continually changed to increase profitability and sustainability in the future through strategically shifting from shifting activities into the mix of different segments that can independently support each other. The firm introduced infrastructure services that will enable the firm to offer extra assistance when required by the employer. Such services include maintenance of properties and property management. The firm focused on becoming an internationally known unit, enabling them to run the following segments.

Property segment

The property segment invests and develops mixed-use commercial and residential properties across the UK. Due to its specifications, it is usually operating under joint ventures. The revenue increased by 8% compared to the previous year, with joint ventures being the major source of revenues in this segment at 66%. The operational profit increased from £5.7m to £17.6m (Kier, n.d). The group increase in profitability has been contributed by industrial divestment. The firm applied a disciplined capital approach to ensure that firm joined a joint venture that would increase its profitability. As of June 30, the segment had capital employed of £122m. The return on capital used improved to 14%.

Construction

The construction segment usually comprises several smaller segments. This segment includes strategic projects, kier places, maintenance, facility management, the environment, and international business. The construction segment has a wide portfolio that provides for construction of projects such as hospitals, defense, and custodial facilities for local authorities and the private sector (Kelvin, 2016). The revenue from this segment was reduced by 19% in the year 2022 due to delayed project completion and a deferred project that has been contracted. This led to aligning the cost base, which saw the operating profit increase by 7% to 61M pounds. During the same year, the south regional business was restructuring at a cost of 39M pounds.

There has been an increase in the order book contracts from 3.3bn pounds to 4.2bn pounds in the year 2021 and year 2022.

Kier places have continued to specialize in working on occupied properties, offices, and residential properties. It provides key services such as maintenance and safety assessment. The international business in UAE has been experiencing some challenges where it is required to maintain its cost base due to the weakness of its market. The segment developed £1,441 in 2022, while in 2021, it had a total revenue of £1,769. The operational profit was £60.8m, while in 2021, it was £56.7m (Kier, n.d).

Infrastructure services

This segment is composed of Highways infrastructure and utility businesses. The part increased the revenue by 17% compared to the previous year. The operating profit was £70m. the highway business section builds and maintains roads, national highways, and transport in London, among others. The firm was able to win contracts at a higher rate as compared to the previous year. The segment is critical to the firm’s business. The firm recorded a revenue increase from £1422m to £1667m. the order of contracts also increased from £ 4.4bn to £5.6bn (Kier, n.d). Good partnerships and joint ventures have contributed to this. The segment reported a net profit of £48.1 from £41.4m.

Segment performance, operating profit, and net assets in 2022

The table represents sales, operating profits, and net assets for the year ending June 2022. From the summary, infrastructure contributed the most at 51.18%, followed by construction at 50.46%. Both property and corporate contributed 4.43% and 0.15%, respectively, to the total revenue.

Operational profits followed a similar trend except for the corporate segment, which reported a loss of 23.15%. By saying failure, the part led to the firm reporting less profit. Due to its large number of contracts to be delivered, the Infrastructure segment reported the highest value in revenue, followed by the construction and property segments.

Table1: Segment performance, operating profit, and net assets in 2022

Capital Structure and Liquidity

Table 2:Capital Structure and Liquidity

Notes

• The data included in the analysis has been drawn from consolidated balance sheets.
• Calculations have excluded the minority interests since they are insignificant to the overall materiality at £1m.
• Since the firm has not included the cash account, other financial assets in current assets have been presumed to contain cash at hand.
• Gearing ratios are computed by dividing debt by the total capital employed.

Kier Group Plc has a capital structure that is low-geared as compared to similar companies in the same industry. The capital structure has changed in the last three years after the firm restructure. The firm undertook a series of activities when it experienced a downturn in revenue. The firm raised a right issue that failed to achieve the target. To save from the situation, the firm sold some of its properties to settle some of its existing debts. (Kongahage, 2019) The capital employed in 2021 was £1384.7, while in 2022, the firm had a total worth of £1460.5m. the debt reported during this period was £360.3m in 2021 and £262.8 in 2022. This represented a 25% and 19% gearing ratio in 2021 and 2022, respectively.

Operational performance

Table 3: Operational performance

Profit margins are calculated by dividing the underlying operating costs full year’s revenue.

The firm’s operational performance in the years 2021 and 2022 shows the firm reported a £3261m and 3143.9 as revenues. The cost of operations or goods produced was significant in the firm’s operations. As a result, the firm reported a low operational profit of £12.7M in 2022, while the previous year, it had reported £23m. The profit margins were 0.71% and 0.400% for 2021 and 22, respectively.

Table 4: ROCE and ROE

• The firm pension liabilities were taken from the financial statement.
• EBIT is profit before tax plus other exceptional items such as goodwill

The adjusted ROCE is the total capital employed, including pension liabilities. Debt is then divided by the adjusted ROCE. The total adjusted capital for £1517.80m in 2021 and £1512.10m. with the inclusion of pension liabilities. The new ROCE is 17.62% in 2022, while in 2021, it was 23.87%. With the increase in liabilities, there is also an increase in debts that leads to a decline in the expected return to capital and equity. Before the restructuring, the firm had a low ROCE since debts were high.

Dividend Policy

Table 5: Earnings per share & Dividends

Dividend policy focuses on the firm’s performance concerning the stocks. When the firm makes a profit, it distributes to the shareholders through dividends as a return. To determine the earnings per share, the net profit is a dividend with the total equity (Baker, 2019). Therefore, compared to 2021 and 2022, the company had earnings per share of 25.0P and 16.8P, respectively. As the profit reported declined, the earnings per share also decreased since equity remained constant. The firm distributed shared dividends. When a dividend is declared, the amount is distributed equally per share. Therefore, the firm reported dividends per share as 6.3p and 32.5p for 2021 and 2022, respectively. Lastly, dividend cover is the number of times profit may cover the outstanding shares. It is obtained by dividing earnings per share by dividend per ordinary share. The dividend cover for both years is 2X. The firm has made it explicit on dividend policy, where it declares dividends when it earns a profit. However, when the firm predicts instances where it cannot issue a dividend, it can offer them in kind.

Shareholders Returns

The performance of FTSE 250 indicates that the industry has been growing, with 2020 being the lowest index recorded. The industry recovers after a decline in performance. The performance of Kier Group Plc, however, indicates a different trend. The firm declined in stock price for the last five years to £70. On January 29, 2018, the firm stock price traded at £1029.30 per stock, as shown in the graph below. With the right failure issue, the tight stocks decline in value losing in the stock market. The has been able to recover in the stock market that saw it removed from FTSE250 index firms.

Forecast

Table 6: Forecast

Forecasting is an important element in assessing the firm’s performance. Through forecasting, the firm can examine its future performance. Kier Group Plc will experience a 9% growth for the next two years. Therefore, the revenue collected will be adjusted by 9% to £3549.585 and £3869.0465. With the increase in revenue, earnings before interest and tax will also increase to £80.59m and £98.12m in 2023 and 2024, respectively. Earning per share and dividend per share will be 23.2p, 26.5p and 9.0p, and 9.9p for DPS. Thus, the shareholder will receive a return from invested funds.

Conclusion

From the reports, the firm conducts segmental reporting. The three segments involved in revenue generation are examined differently to determine their profitability. From the analysis, the infrastructure services had the highest revenue contribution, followed closely by construction. Both segments contributed over 90% and thus played a significant role in the firm’s performance. The firm applied a strategy where it maintains a low gearing ratio, thus bearing a lower cost of servicing the debts. Through such systems, the firm can position itself, avoid loss-making opportunities, and concentrate on contracts and services that lead to profitability.

Kier Group Plc needs to consider its costs. From the analysis, the costs cover over 95% of the revenue, leaving a very small portion for administrative expenses. With a gross profit of less than 5%, the firm may need help to have adequate retained profits and distribute some of the profit to shareholders.

Dividend cover is very stable in terms of underlying profits. The stability of the profit and dividend trend over the last few years and a general expectation of continued steady growth suggests a similar outlook for the dividend. The share value that has been derived from the company will continue. The firm should continue to fund its activities with equity to ensure its stability and growth.

References

Baker, H. K. (2019). Dividends and dividend policy: An overview. Dividends and Dividend Policy, 1-19. doi:10.1002/9781118258408.ch1

Kelvin, C. (2016). Construction projects. Quality Management in Construction Projects, 151-178. doi:10.1201/b10351-10

Kongahage, K. (2019). Analysis of share price impact of dividend announcements with dividend cover, firm size, and capital leverage in the Sri Lankan Stock Market. doi:10.31357/fmscmst.2008.00166

Kier, (n.d). A leading UK Construction and Infrastructure Services Company. Retrieved January 27, 2023, from https://www.kier.co.uk/

Reports

Kier Group Plc Annual Report and Accounts 2021

Kier Group Plc Interim Report for six months to June 30, 2022