Kier Group: Solid Foundation, Limited Growth Runway

I've been tracking Kier Group's steady recovery, and while the fundamentals look reassuringly stable, I'm not convinced there's enough upside to justify the recent 60% rally since March. Here's what caught my attention in their latest results.

Revenue Growth Finally Materialising

After years of stagnation, Kier's turnover is building momentum again. Revenue jumped 17% to £4bn in FY24, driven primarily by Infrastructure Services volumes from HS2 work and the Buckingham Group rail acquisition. The order book has grown to £10.8bn—a 37% increase over four years—which provides decent visibility going forward.

What I find encouraging is that roughly 60% of their backlog sits on cost-plus or target-cost contracts, limiting their exposure to inflation risk. With 90% of FY25 revenue already secured, there's genuine predictability here.

Margins: Decent but Plateauing

Kier's adjusted operating margin hit 3.8%, comfortably above their medium-term target of 3.5%. For the construction industry, these margins are perfectly respectable. But here's my concern—they're already outperforming their own objectives, which suggests they didn't think this level was achievable initially.

Infrastructure Services is the real profit engine, delivering 75% of adjusted operating profit on just 51% of revenue with a healthy 5.6% margin. Construction remains volume-heavy but lower-margin at 3.6%. I doubt they can squeeze much more juice from these segments without fundamental changes to their business mix.

Balance Sheet: From Liability to Asset

The financial transformation has been impressive. Average month-end net debt halved to £116m, and they ended FY24 with £167m net cash after refinancing with £250m of 5-year senior notes. The deleveraging story is complete, removing a major historical overhang.

The Property Puzzle

Management keeps talking up their Property business as a future profit driver, targeting a 15% return on capital employed versus the current 3.9%. While they've increased their capital allocation range to £160-225m, this segment generated just £71m revenue in FY24. Even if it doubles, it's unlikely to be transformational for a £4bn revenue business.

Valuation Reality Check

Trading at 196p with a P/E of 9.8, Kier looks reasonably valued against my valuation of 124p (assuming 4% growth and an 8x multiple). The recent share price surge may have been driven more by general market rotation into defensive stocks than fundamental improvements.

My biggest worry? They're almost completely reliant on government spending. While this provides stability, it also caps their growth potential. I think the company should be looking to expand into private construction contracts, which would presumably bring improved margins, albeit with greater volatility.