Property company Kier (LSE: KIE) has released upbeat full-year results. They show that the company is moving in the right direction. They also provide guidance as to whether now is a good time to buy it, or if a sector peer such as Persimmon (LSE: PSN) holds more promise.
Kier’s revenue increased by 26% versus the prior year. Alongside an increase in operating margins of 50 basis points, this contributed to a rise in pre-tax profit of 45%. This included a full-year contribution from recently acquired Mouchel and benefitted from improving cost efficiencies as well as an increased share of post-tax results of joint ventures.
The net debt position of the company has improved significantly versus a year ago. Net debt now stands at £99m, which is 30% lower than a year earlier. This reduces Kier’s risk profile during an uncertain time for UK housebuilders. However, Kier seems to be confident about its future outlook since it increased full-year dividends by 17% on a per share basis. This puts it on a yield of 5.2% from a dividend covered a healthy 1.6 times by profit.
Safety margin
Clearly, the UK housebuilding sector offers a wide margin of safety at the present time. That’s thanks at least in part to the uncertain outlook provided by Brexit. But although the Bank of England is set to offer an increasingly loose monetary policy, demand for houses could still be hit by tax changes and by increased fear among investors and first-time buyers.
However, Kier offers an exceptionally wide margin of safety, which makes its shares very appealing right now. It trades on a price-to-earnings growth (PEG) ratio of just 1.4 thanks to a forecast rise in profit of 6% in the next financial year. This indicates that while not without risk, Kier’s potential rewards are high.
In fact, Kier’s investment appeal is greater than that of Persimmon. That’s largely because Persimmon is forecast to grow its bottom line by 9% this year, but is then due to record a fall in earnings of 9% next year. This means that dividends are expected to flatline over the next couple of years, although Persimmon still yields 6.1%. This is higher than Kier’s yield of 5.2% and is covered by profit 1.6 times, which is the same as for Kier.
However, Kier has superior income potential thanks to its forecast growth in earnings. which should lead to a brisk increase in dividends. Furthermore, it offers greater diversity than Persimmon and potentially a lower risk profile thanks to its acquisition of Mouchel. Given its brighter outlook, Kier looks set to outperform Persimmon, although its near-term performance could be highly volatile thanks to uncertainties in the housing market.