Kier unveils £32m interim pre-tax profit

Kier has showed the value of its hybrid operating model, producing an interim pre-tax profit of £32m despite the troubles in the house building sector.

Kier’s construction division generated a pre-tax profit of £29m which more than countered the £22m loss in the partnership homes business.

Kier’s financial first-half covers the six months to 31 December 2008.

John Dodds, chief executive said: “Kier has continued to perform well and in line with expectations in spite of the current difficult economic conditions.

“Our group continues to be profitable, with positive net cash and our order books remain healthy, particularly in construction and support services.

“The pleasing result reflects the diversity of our earnings base and our approach to risk management.”

Segmental analysis provided by the group shows:

Turnover

• £790m – construction (figure in previous comparable period: £780m)
• £220m – support services (£180m)
• £68m – partnership homes (£180m)
• £23m – developments (£67m)

Pre-tax profit/loss

• £29m – construction (£24m)
• £8m – support services (£7m)
• loss of £22m – partnership homes (previous figure: profit of £13m)
• loss of £6m – developments (previous figure: profit of £5m)

The construction is remarkable not only for being cash generative but for the level of profit margin. The latest period resulted in a margin of 3.6% from construction which was even higher than the 3.1% figure previously.

Back in the days when Kier, led at the time by Colin Busby, was settling for a 1% margin on safe projects, high flying construction rivals such as Alfred McAlpine and Skanska were arguing that their 3% margins were figures that anyone should be matching.

But today, with Alfred McAlpine buried and Skanska having had to fly in a new leader to mend its wounds, Kier’s latest profit margin could well be the one to beat in the current round of financial results – it is certainly well clear of the 0.9% margin that Morgan Sindall reported yesterday from its construction business.

Kier’s new figures contain a few exceptional items.

Land bank write-downs ran to £19m and redundancy costs added £800,000. But on the other side of the fence was a £24m credit thanks to a downward trimming of the group’s pension scheme benefits.

Kier group had £80m of net cash at the end of 2008, down from £140m a year earlier, while the construction operation enjoyed £410m of cash, representing a rise of £40m over the previous figure of £370m.

The order books for construction and support services run to £3.3bn (2007 figure: £3.2bn).

The situation in Kier’s pension scheme is that when valued to accountancy standard IAS19 there was a net surplus of £2.7m which is a remarkable turnaround from the deficit of £33m it was running just six months earlier.

The improvement in the period is largely due to two factors, said Kier.

First, changes to pension benefits for active members in the final salary section of the Kier Group Pension Scheme led to a reduction in the deficit of £24m.

Second, actuarial gains reduced the deficit by £20m.

Kier decided to restrict future pensionable salary increases for active members to the “lower of actual pay increases and the annual rate of increase in RPI”.

Earlier valuations assumed that salaries would increase at 1.5% above the rate of increase in RPI.

Justifying the change, Kier said it “will reduce volatility in the scheme liabilities in the future”.

The actuarial gains for accounting purposes result from the requirement, under IAS19 rules, to apply a discount rate to future liabilities based on AA corporate bond yields.

“While the board considers this to be an unrealistic discount rate to apply in the current market, the mathematical exercise results in a small pension surplus at the period end,” said the group.

“We continue to make special contributions to the scheme, over and above our normal contributions, at the rate of £8m per annum for 10 years”.