13th Sep 2007 07:00
Kier Group PLC13 September 2007 KIER GROUP PLC PRELIMINARY RESULTS FOR THE YEAR TO 30 JUNE 2007 •Pre-tax profits* up 30.5% to £79.6m (2006: £61.0m) •EPS before amortisation of intangible assets up 27.3% to 158.9p (2006: 124.8p) •Full year dividend rebased by 92.3% to 50.0p (2006: 26.0p) £€114.8m of cash generated from operating activities •Construction and Support Services order books at record levels •Homes order book at 31 August 11% ahead of last year by value *Pre-tax profits are stated before amortisation of intangible assets of £2.0m(2006: £1.9m) and after deducting joint venture tax of £1.4m (2006: £1.4m) Commenting on the results, John Dodds, Chief Executive said: "The Group is in great shape. Our Construction order books are at record levelsand our Construction businesses are experiencing very strong markets allowing usto be highly selective in the work we undertake. Our Support Services businesshas reached new heights in terms of volume and profits and with the new awardsin 2007 and potential awards for 2008 we can expect increased growth in thecurrent financial year. In Homes the market continues to be sound and, havingestablished a new operating region during the year, we continue to look forfurther opportunities to expand the business. Our Property division has a goodportfolio of developments in the pipeline and is seeking to grow further throughstrategic acquisitions; and in PFI value will continue to be created from newand existing investments. "With its strong markets, a sound business infrastructure and talentedmanagement teams I have enormous confidence in the future prospects for Kier."Chairman's statement I am delighted to report record results for Kier Group plc for the year to 30June 2007. Revenue was up 15.8% to £2,127.9m (2006: £1,838.3m); profits beforetax (before minority interests) grew 31.3% to £77.6m (2006: £59.1m) and earningsper share before the amortisation of intangible assets increased by 27.3% to158.9p (2006: 124.8p). The excellent trading result was complemented by outstanding cash performance,one of our key measures particularly within the Construction division. Net cashinflow from Group operating activities was £114.8m (2006: £96.6m) leading toyear-end net cash balances of £148.4m (2006: £111.2m). We have experienced strong order intake which led to record year-end combinedorder books for Construction and Support Services of £3.5bn (2006: £2.9bn). OurHomes division has had a good year with the number of unit sales 16% ahead oflast year and order books at 31 August 5% ahead of the same time last year bynumber of units and 11% ahead by value. In proposing a dividend for this year we have taken into account the comparativecompound annual growth rates in dividends and earnings per share over the lastten years and whilst dividends have increased at 15% per annum, earnings pershare have increased at 23% per annum, widening the dividend cover over theperiod. It is, therefore, proposed that we adjust the dividend this year to atotal of 50.0p for the year (2006: 26.0p), an increase of 92.3% and covered 3.1times by earnings per share. Following this rebasing the Board intends tocontinue its progressive dividend policy. The final dividend of 40.4p will bepaid on 4 December 2007 to shareholders on the register on 28 September 2007 andthere will be a scrip dividend alternative. Board changes Peter Berry, non-executive director, retired from the Board on 30 June 2007 andI should like to thank him for the significant contribution he has made to theGroup since joining the Board in 1997. He has advised and supported the Groupthrough a huge amount of growth and change over the last ten years and hisinvolvement and wise counsel will be very much missed by all of us. I am pleased to welcome Chris Geoghegan to our Board as a non-executive directorfrom 1 July 2007. Chris joined the Board of BAE Systems in July 2002 as chiefoperating officer with responsibility for European joint ventures and UK defenceelectronics assets. His experience will contribute significantly to the furthergrowth of the Group. Prospects Our divisions are enjoying excellent market conditions, record order books andhealthy cash balances all of which gives me great confidence in the prospectsfor the Group and for further profitable growth in 2008. Chief Executive's review Overview Kier Group plc has once again delivered excellent results for the year to 30June 2007 continuing the reliable, consistent performance that has become aprominent feature of our business. This performance, a consequence of ourlong-term approach to both risk management and business opportunities, isreflected in the strong earnings per share record which has had a compoundannual growth rate of over 23% for the last ten years and a 28.3% increase thisyear to 155.0p (2006: 120.8p). Revenue, profits and cash generation for the year to 30 June 2007 are at recordlevels. Our order books for the new financial year are very strong with ampleopportunity available reflecting probably the best Construction and SupportServices markets that we have ever experienced and a housing market thatcontinues to be sound. Our integrated contractor/developer approach to mixed-useschemes continues to set us aside from others and provides excellentopportunities in the affordable housing-led regeneration sector. Financial performance Revenue for the year at £2,127.9m (2006: £1,838.3m) was 15.8% ahead of last yearwith strong growth from all of our divisions. Operating profit, afteramortisation of intangible assets and joint venture interest and tax, was 31.6%ahead of last year at £77.9m (2006: £59.2m) and profit before tax increased by31.3% to £77.6m (2006: £59.1m) before minority interests of £0.8m (2006: £nil). Adjusted earnings per share, before the amortisation of intangible assets,increased by 27.3% to 158.9p (2006: 124.8p). The robust trading performance was supported by excellent cash generation in theyear with £114.8m generated from operating activities (2006: £96.6m) resultingin a year-end net cash position of £148.4m (2006: £111.2m). Further specialpension contributions of £11.0m were made to the Kier Group Pension Scheme inthe year (2006: £31.5m). In addition we acquired the shares in Hugh BournDevelopments (Wragby) Limited for £46.8m of which £24.0m was paid in the year. The Construction division generated £62.5m of cash in the year (after tax anddividends) reflecting a strong underlying trading performance and increasedvolumes of revenue. The division ended the year with a record cash balance(including intra-Group loans) of £361.2m (2006: £298.7m). Group structure and strategic developments Kier Group comprises five divisions; Construction, Support Services, Homes,Property Development and Infrastructure Investment (investment under the PrivateFinance Initiative 'PFI'). The Group's management structure and segmentalanalysis for reporting purposes are based on the five divisions. The Group has a well established business model that has underpinned its growthand development over a number of years. Whilst our origins are in constructionactivities, by undertaking strategic investments in housing, propertydevelopment, support services and PFI we have developed a business modelcomprising complementary activities. They provide a balanced cash profileenabling the funds generated by lower margin construction operations to beinvested in higher margin, asset-rich businesses such as housing, propertydevelopment and PFI, while operationally we are able to combine complementaryskills to offer fully integrated services to clients throughout the UK. In 2007we have again seen many examples of mixed-use projects on which our businesseshave worked together to provide a total in-house solution for the delivery ofthese developments. We are one of the few Groups able to do this and we intendto continue to use our skills to generate further profit growth from theseopportunities. As part of our strategy to grow our Homes division we acquired the shares inHugh Bourn Developments (Wragby) Limited in July 2006. This business hasprovided the fifth operating area for our Homes division, extending ouroperations north of Allison Homes' area of Lincolnshire and NorthCambridgeshire. Business review, markets and outlook Construction The Construction segment comprises Kier Regional and Kier Construction. KierRegional encompasses our ten regional contracting businesses, our affordablehousing business and major building projects. Kier Construction comprises theGroup's infrastructure and overseas operations with civil engineering,infrastructure, rail, mining and remediation capability. Overall revenue increased by 15.9% to a record £1,411.2m for the year (2006:£1,218.1m) with good growth in both Kier Regional and Kier Construction.Operating profit increased by 21.7% to £21.9m (2006: £18.0m) and the operatingmargin increased to 1.6% from 1.5% last year. Cash generation, one of our key performance measures, has been extremely strongagain this year with cash balances at 30 June 2007 £62.5m higher than theprevious year end (after tax and dividends) and average balances for the year£49m ahead. Contract awards were higher than last year providing a record orderbook of £1,710m at 30 June 2007 (2006: £1,470m). Kier Regional business review The performance in the Kier Regional businesses was outstanding this year withexcellent progress made in the key performance measures of revenue, profitmargins and cash. Revenue, at £1,209.9m, was 10.7% ahead of 2006; margins haveagain increased and the cash performance remains strong with average cashbalances, including intra-Group loans, around £42m higher than last year, endingthe year at a record £336m (2006: £278m). Contract awards were ahead of last year with 55% arising from private sectorclients (2006: 57%) and 45% from the public sector (2006: 43%). Negotiated,partnered and two-stage tenders represented around 64% of work secured (2006:65%) reflecting the strength of our long-term relationships with clients, ourregional framework agreements and our commitment to long-term partnering. This,coupled with the relatively low value of contracts undertaken within thebusiness, averaging £4.7m, (2006: £3.2m) continues to provide a lower-risk, andmore sustainable, order book. Demand for commercial property has been strong in the year representing 23% ofour awards including a £66m office scheme in Snow Hill Birmingham by Kier Build,our major projects business, and a £36m office block, The Pinnacle, in thecentre of Milton Keynes by a joint team comprising the Kier Regional businessesof Marriott Construction and Kier Build. The retail market continues to bebuoyant in most regions, representing around 10% of awards secured during theyear. A number of contracts have been awarded for Morrison, John LewisPartnership & Waitrose, Sainsbury and Tesco including a 'Tesco Extra'environmental concept store at Shrewsbury incorporating geothermal heating andcooling, rainwater harvesting and a host of other sustainable features. Public sector demand has also been strong, particularly in the education sectorwhich represented 22% of our awards for the year. New schools work has beensecured by a number of our businesses either conventionally or throughframeworks, most notably for the South East Centre of Excellence (SECE), and aprimary schools framework in which Kier was selected as one of three partnercontractors for South Lanarkshire Council. Colleges and universities alsoprovided a strong work stream nationwide. We were delighted to have beenselected as one of six preferred contractors on the 'Contractors' Framework forAcademies and other Educational Facilities' which is forecast to provide £1.7bnof work, in total for the six contractors over the next four years. Ourframework agreement with the Home Office for custodial work on prisons isaffording us good opportunities providing 8% of awards in the year with asignificant level of further contracts in negotiation. The affordable housingsector is also buoyant presenting good prospects through our frameworkagreements with housing associations and local authorities. The divisioncompleted 850 affordable housing units this year including the 161 unit BurfordWharf scheme for Dominion Housing and was awarded around £98m of new contractsin the year. We have seen an increase in the number of opportunities for two or more of ourbusinesses to combine their skills, resources and geographical experience inorder to deliver appropriate services to customers. The recently awarded projectto deliver the new £35m UK Supreme Court for the Ministry of Justice inParliament Square, London is a prime example of this where the skills of Wallis,our specialist refurbishment contractor, combined with Kier Property to securethe project. Marriot Construction is working with Kier Property to deliver a newUK headquarters for EDS in Milton Keynes and Kier South East has joined withBellwinch to develop 281 flats in Maidstone. In addition Kier Plant providestower cranes and site accommodation to a large number of our sites and KierBuilding Service Engineers, providing mechanical and electrical design services,is often an integral part of our construction teams. Kier Construction business review Kier Construction saw a 61.0% increase in its revenue in the year to £201.3m(2006: £125.3m) through a combination of growth in UK framework contracts,traditional UK civil engineering contracts and overseas work. In UK civilengineering, a good performance was achieved in our five-year railinfrastructure framework for railway structures renewal in East Anglia forNetwork Rail. In the water sector, the five year joint venture integratedalliance under the Asset Management Programme 4 for United Utilities isdeveloping well. At Milford Haven, where we are carrying out offshore works for the South HookLNG terminal, we are making excellent progress despite poor weather conditionsand remain on target to meet the client's planned date of commissioning by May2008. Our remediation capability, where brownfield sites are redeveloped forcommercial, residential or mixed use, continues to grow. In Peterborough workhas now completed on a former Anglian Water site for our Homes business and inUxbridge, Kier Construction has successfully remediated a British Gas site forKier Property ahead of development of a mixed-use scheme. Both of these projectswere completed on time and, more importantly, within budget giving us a firmfoundation of experience to pursue similar opportunities. At our private open cast coal mine, Greenburn in East Ayrshire, we have nowextracted 2.0m tonnes of coal since production began in April 2004. We expectproduction to continue into 2012 and have forward sold 38% of the remaining 2.0mtonnes of anticipated coal at favourable prices. Overseas good progress made in the Caribbean on Jamaica's Norman ManleyInternational Airport and on a large transportation centre in Kingston, Jamaicawas overshadowed by a challenging project in Antigua comprising a largefive-star hotel complex for Sandals. The hotel has now opened on a phased basisand the projected financial outturn of the contract has been provided for infull in the results for the year to 30 June 2007. Construction markets and outlook The UK construction market remains buoyant in both the public and privatesectors. In the public sector healthcare spending slowed during the year but isagain strengthening and the outlook for education and custodial projects ispositive. As the education and custodial sectors operate procurement frameworkarrangements of which we are a part we are well placed to attract further work.Affordable homes and the social housing sector remain strong and we welcome therecent government Green paper on housing. This indicates provision of £8bn ofpublic money for the affordable housing programme between 2008 and 2011 and atarget of at least 70,000 new affordable homes each year by 2010/11 of which45,000 would be for social rented accommodation. This represents a 50% increasein the supply of new social homes in the three years. These planned increaseswill provide good opportunities for our Construction businesses and inparticular Kier Partnership Homes which has recently achieved 'partner status'with the Housing Corporation allowing us to bid directly for social housinggrant funding. We have a good track record in civil engineering work for power stations andrecent awards at Immingham and Langage confirm our strong reputation in theenergy markets which, we believe, will continue to expand and includeopportunities in the waste to energy sectors. Overseas, our relationships with clients and joint venture partners areproviding us with good opportunities, particularly in Romania, where we havenegotiated contracts for a shopping mall and residential apartments. In theMiddle East, we are building on our experience of phosphate mining in Jordan andare in negotiation on a contract to mine phosphate in Saudi Arabia in jointventure with a local partner. The UK Construction markets are probably the best that we have ever experienced,providing us with record order books at 30 June 2007 of £1,710m (2006: £1,470m)supported by a significant pipeline of contracts in the final stages ofnegotiation. With these strong, good quality order books, the scene is set todeliver further growth in our construction division over the next few years. Support Services Support Services comprises four business streams: Kier Building Maintenance,providing reactive and planned maintenance principally to local authorityclients, housing associations and Arms Length Management Organisations; KierManaged Services, providing facilities management services to public and privatesector clients; Kier Building Services Engineers; our specialist mechanical andelectrical design, installation and maintenance business; and Kier Plant whichhires plant to Kier Group companies and external clients. Support Services business review Revenue in the Support Services segment rose 12.2% to £315.5m (2006: £281.3m)driven by a combination of organic growth and the inclusion of a number of new,large building maintenance contracts awarded in the year. Operating profit,before deducting the amortisation of intangibles of £2.0m and minority interestsof £0.8m (2006: £2.0m and £nil), increased by 40.2% to £12.2m (2006: £8.7m) atan improved margin of 3.9% (2006: 3.1%) exceeding our original target set forthis year. The cash position within the division remains strong with £3.3mgenerated in the year to give a closing balance of £15.8m (2006: £12.5m). Onceagain we have seen significant growth in the order books which stand at £1,788mat 30 June 2007 (2006: £1,396m), including Building Maintenance at £1,211m(2006: £844m), Managed Services at £528m (2006: £537m) and Kier BuildingServices Engineers at £49m (2006: £15m). In Building Maintenance, the largest division with revenues of £228.3m (2006:£172.5m), we have enjoyed unprecedented success over the last year. We now lookafter 200,000 public sector homes throughout the country, having secured £525mof new contracts in the year including Hull, Sefton (Liverpool), Harlow, Harrow,Hackney and Brighton. Kier Sheffield LLP, our partnership with Sheffield CityCouncil, provided the largest volume of revenue for the year at £107.1m (2006:£94.2m) and includes Sharrow Industries, a sheltered workshop run by KierSheffield LLP which manufactures and supplies kitchens, windows and doors underan exclusivity agreement with the five contractors under the Decent Homesinitiative. Sheffield City Council's share of profits from the LLP for the yearwas £0.8m and has been disclosed as a minority interest in the income statement.A good performance was achieved in Kier Islington on increased volumes of £46.6m(2006: £37.6m) and we were proud to have been involved in Islington Council's UKHousing Award for preventing homelessness through the Home Shelter Scheme. During what has been predominantly a year of consolidation, Kier ManagedServices continued to secure a good mix of both public and private sectorcontracts largely through renewals. There was significant activity in the PFIarena, of which a good share of contracts emanated from Kier Project Investmentfor whom Kier Managed Services manages a portfolio of healthcare projects,libraries and schools. The past year has seen a record £11.0m of investment by Kier Plant in newequipment including tower cranes, generators, telehandlers and siteaccommodation. This brings us to a fleet of 95 tower cranes and 3,400accommodation units on hire to both Kier companies and external clients. Support Services markets and outlook Opportunities in the facilities management market continue to emerge for KierManaged Services in both the public and private sectors and our strategy ofbeing selective on what we pursue is reaping rewards. In Building Maintenance both local authority expenditure, through housingrepairs and maintenance budgets, and central government expenditure, through theDecent Homes initiative, continue to provide good potential for new work. Anumber of new contracts were awarded to us in the year with combined annualrevenues of around £100m. These, like Sheffield, are likely to grow as ourpartnerships flourish to embrace other areas of Kier expertise, including streetcleaning, street scene works and grounds maintenance. A strong pipeline of othergood opportunities continues to be explored and we are preferred bidder onHammersmith & Fulham (approximately £5m per annum) and Hackney (approximately£4m per annum) and short-listed as one of two bidders on Stoke (approximately£35m per annum). We have a strong track record of delivery on the high value Building Maintenancecontracts which places us in a good position to secure further work. Homes Kier Residential, our housebuilding division, comprises five companies: AllisonHomes operating throughout Lincolnshire and North Cambridgeshire; BellwinchHomes with sites in the south and south-east; Kier Homes, operating across thecentral belt of Scotland; Twigden Homes with activities in East Anglia and theWest Midlands; and the recently acquired Hugh Bourn Homes, operating as KierHomes Northern, in north Lincolnshire. Homes business review Kier Residential sold 1,767 homes in the year (2006: 1,522) representing a 16.1%increase in unit sales over last year. Average selling prices were marginallylower than last year at £179,300 (2006: £180,100) reflecting the inclusion of162, slightly lower value, units from Kier Homes Northern which was acquired inJuly 2006. Revenue of £316.8m was generated from housing sales (2006: £274.2m)and land disposals generated a further £8.3m of revenue (2006: £3.7m) at anominal profit of £0.2m (2006: £0.1m). The proportion of social housing salesremained constant at 16% (2006: 16%). Operating profit from housing salesincreased by 14.7% to £47.6m (2006: £41.5m) at a margin of 15.0% (2006: 15.1%). On 31 July 2006 we acquired the shares in Hugh Bourn Developments (Wragby)Limited for a total consideration of £46.8m representing the market value ofland, work in progress and fixed assets after taking into account liabilitiesand adjustments. £24.0m was paid during the year and £12.9m on 2 July 2007 withthe balance due on 1 July 2008. Hugh Bourn (rebranded Kier Homes Northern) hasformed the foundation for a fifth trading division of Kier Residential. As well as the corporate acquisition, Kier Residential had a busy year in 2007.A number of new developments started including our first carbon neutraldevelopment of 281 flats in Maidstone with Kier South East, the previousoccupier of the site, as contractor. At Sunbury, Kier Residential is developing96 homes, 48 of which are for a housing association, on a site previously ownedby Kier Property. In Scotland a development of 489 units at Belvidere Village inthe East End of Glasgow was launched in November 2006 with the first completionsbeing taken in the year to June 2007. A number of large sites were purchasedduring the year including 192 units at Costessey, Norfolk, 245 units at ReddingPark in the central belt of Scotland, 213 units at Little Paxton, Cambridgeshireand 225 units at Turnford College, Hertfordshire. In addition detailed planningconsent was granted for 330 units at Stoke Mandeville, Buckinghamshire and thefirst phase of 550 units at Fengate, Peterborough. During the year £87.5m was spent on selective land purchases, including asignificant amount on deferred terms, and at 30 June 2007 the land bankcontained 6,465 units (2006: 5,863 units) which, at 3.7 years' worth of currentyears sales, is marginally less than our target holding of four years' unitsales. We are planning further investment in land in our current areas ofoperation and continue to look for opportunities to expand the business. In addition to land with planning consent we hold approximately 11,500 plots ofstrategic land mostly under option which continue to provide a valuable routefor land acquisition as, historically, between 16% and 18% of our annual unitsales have originated from this process. Housing markets and outlook The typically quiet selling period over the summer started earlier than inprevious years in our areas of operation but also ended earlier withreservations in the last three weeks of August ahead of the same period lastyear. The order book at 31 August, comprising reserved and exchanged units, is11% ahead of last year by value and 5% ahead by number of units reflecting thehigh level of social housing units included in last year's order book. We will be trading from broadly the same number of outlets this year as last butare anticipating a notable increase in the number of unit sales from three ofour businesses; Kier Homes Northern, our newest business, is gearing up itsoperations in line with the rest of the division; Kier Homes in Scotland andBellwinch, our south-east business are both benefiting from a number of majornew developments this year which are currently trading very well. Around 40% ofour projected unit sales for the full year are already secure by way ofcompletions, exchanged contracts and reservations and, similar to the pattern ofsales in 2007, we expect the balance of units to be skewed to the second half ofthe year. The outlook for regeneration and brownfield opportunities is excellent and anumber of developments are expected to come forward including two in jointventure with Kier Property: a major project in Ashford New Town and the OrdnanceSurvey site in Southampton, together providing over 1,000 units. We also welcomethe recent Green paper on housing which should benefit our business over thenext few years. Property Our Property development activity covers commercial, offices, industrial, retailand mixed-use sectors largely on a low-risk basis. It operates through KierVentures, a wholly owned subsidiary, and Kier Developments, a 50% joint venturewith the Bank of Scotland. Kier Property enjoyed another highly successful year, significantly enhancingits portfolio through acquisitions as well as crystallising considerable valueon several existing properties. The portfolio now totals 29 propertiesrepresenting over 5m sq ft of development with a prospective end value of over£930m. The active management of its properties led to a 29.1% increase in revenue to£61.3m in the year (2006: £47.5m), with operating profit up from £9.2m to £12.1mrepresenting a margin of 19.7% (2006: 19.4%). A number of developments were sold during the year including two to Invista RealEstate: the 80,000sq ft Mannington Retail Park development in Swindon; and the216,000sq ft first phase of Reading Central, a commercial site in the centre ofReading. We have retained a 50% equity stake in Mannington Retail Park and havecreated an innovative joint venture with Invista Real Estate to bring forwardboth of these major developments with Kier taking on the development managementrole. At Mannington we will develop 45,000sq ft of new retail units and recladan existing terrace of four units. At Reading, a revised planning applicationhas been submitted and work is expected to begin on site by the end of 2007 withdiscussions under way amongst a number of potential occupiers. Since thefinancial year-end, Kier and Invista have added a third development to the jointventure, purchasing the 23-acre Ponders End industrial estate in Enfield. Thiswill be converted into a 500,000sq ft regeneration project, comprising a mix ofuses including hotel, self-storage, car showroom, industrial and offices. The year saw Kier Property, through our integrated developer/contractor approachwith other Group companies, selected as development partner for a number ofprojects including the new United Kingdom Supreme Court, in Parliament Square,London. The £35m project comprises a 70,000sq ft renovation of the Grade II*listed Middlesex Guildhall by Wallis, our specialist refurbishment contractor,which will be let to the Ministry of Justice on a 30-year lease on practicalcompletion in the spring of 2009. We also finalised our agreement to deliver anew 150,000sq ft head office for Ordnance Survey at Adanac Park in Southampton.Through our Construction, Support Services and Homes divisions, we willredevelop Ordnance Survey's existing office in the area into a 24-acre siteembracing residential, commercial, office and industrial uses. Regeneration is at the forefront of Kier Property's approach to development. Aswell as the Southampton and Ponders End projects we made progress on a number ofkey regeneration projects during the year: • In October 2006, we were selected to deliver a major mixed-usesustainable development of a 4.5-acre town centre site in Newcastle called GQ2.The scheme will include a blend of residential, leisure, retail, hotel andoffice uses. • Kier Property is also set to deliver a £35m regeneration of a formergas works in Uxbridge, following a comprehensive remediation of the site duringthe year by Kier Construction. • The redevelopment of the former Shippams food factory in Chichesterwas also completed in the year, with New Look and Hennes taking occupation ofthe 50,000sq ft of retail space. • Work has now completed on a new 175,000sq ft replacement produce andflower hall for the Western International Market, near Heathrow which will allowus to bring forward a 300,000sq ft distribution scheme on the site of the oldmarket. Kier Property's industrial division continued its success. This includeddelivering 145,000sq ft of development in Weybridge, Surrey which was almostentirely pre-let or pre-sold, under the Trade City brand. Trade City has nowdeveloped almost 1m sq ft of bespoke industrial units for local and nationaloccupiers. At Warth Park in Northamptonshire work has started on a 250,000sq ftwarehouse which, on completion, will be sold to Tesco Pension Fund. Property markets and outlook Looking ahead, the relationship with Invista is likely to be further augmentedwith the addition of a second 125,000sq ft phase of Reading Central. Severalsites within Kier Property's existing portfolio will be brought forward tomaximise value for the company including the recently acquired Breakspear House,a former Royal Mail building in Hemel Hempstead. This will be redeveloped forindustrial, office and hotel uses complementing our nearby Trade City Hemelsite, which is nearing completion. We are hopeful of achieving planning consent, in the near future, on a number oflarge regeneration schemes in which we are involved including Poole and AshfordNew Town which will use the multi-disciplined services within Kier Group. Occupational demand continues to be strong but we anticipate a correction inpricing in the property investment market which we believe will lead to furtheropportunities for strategic acquisitions of sites and businesses where we areable to add value through the development process and asset management. Infrastructure investment Kier Project Investment (KPI) manages the Group's PFI interests. The corestrength of KPI is its ability to bring together the diverse range of skills andresources within the Group and combine these with a financial package to deliverhigh quality buildings and services to meet the needs of the public sector.Having been involved with, and committed to, PFI projects since 1996, KPI isable to demonstrate continuity of involvement from early design and conceptstage, through construction, to facilities management and whole-lifesustainability solutions. Infrastructure investment business review In July 2006 financial close was achieved on the new Kent Police Constabulary, aground-breaking project incorporating several aspects of sustainability in itsdesign including ground source heating. This brought our portfolio of PFIprojects to 13 and our committed equity investment in PFI to £22.8m, of which£15.5m has been invested to date. Good progress is being made on the projects under construction including TheGarrett Anderson Centre at Ipswich Hospital, a clinical services treatmentcentre. The project is on schedule to be completed at the end of 2007, with the£27m construction project being undertaken by a collaboration of two KierRegional businesses. Similarly, the six Norwich schools scheme for NorfolkCounty Council has progressed well with the first phase of Taverham SecondarySchool in Norwich, a conversion project comprising part new build and partrefurbishment, now handed over. The period also saw construction completed atthe Meadowhead and Westfield Schools in Sheffield. Infrastructure Investment markets and outlook Although our traditional markets of education and health have slowed, byoffering a one-stop package including investment, construction, facilitiesmanagement and ongoing building management services we are able to provide thesuccessful delivery of built environment requirements for communities throughoutthe UK. This will now include new markets for us, such as fire stations, prisonsand waste projects, all areas in which our construction division has skills andexpertise. Our portfolio of projects, held at cost in the balance sheet, will continue toprovide additional value through refinancing and possible disposal opportunitiesin the future. The directors' valuation of the committed investment in ourportfolio at 30 June 2007 was approximately £49m based on discounting the cashflow from investments in financially closed projects at 7%. Health & Safety Kier Group's management strategy of Safety, Health & Environmental issuescontinues to be a significant area of focus for all members of our managementteams and employees. The past year has seen a clear focus on people issues, raising awareness withinthe workforce and supply chain of the areas that cause injury and ill health.One of the biggest challenges to our industry is tackling the professional risktakers by re-educating them to work safely. Part of Kier's programme, linked tothe 'Don't Walk By' message, involves addressing behavioural issues through aprocess under development by our in-house occupational psychologist planned tofurther enhance the safe working environment which we require on all of ourprojects. Kier Group is an active member of the Major Contractors Group (MCG) andcontinues to support and deliver the MCG Health & Safety Strategy for bothsafety issues and occupational health improvements. The positive proactivevigilance and professionalism of our site teams has ensured that we maintain anddevelop a positive safety culture. Our Accident Incident Rate (AIR) in 2007 was640 per 100,000 staff and subcontractors measured against a HSE benchmark of946. In recognition of the overall efforts made by Kier staff, employees and supplychain in maintaining safety vigilance we were awarded the Quality inConstruction Award for Safety Management for the second successive year and KierGroup companies received 11 RoSPA Gold Medals, 9 RoSPA Gold, 1 RoSPA Silver and16 British Safety Council Awards. People The talent, commitment and enthusiasm of our people provide the winningcombination behind the Group's unbroken record of growth. Whatever the scope ofproject we undertake, its location or its complexity, it will involve Kierpeople exercising individuality, flair and a commitment to achieving success.The extent of awards won, commendations received and personal achievementsthroughout the year demonstrate our strong commitment to high quality servicedelivery. I am proud of our Group and what we can achieve and I would like totake this opportunity to thank all of our people for their ongoing contributionto our record-breaking achievements and for upholding our core values. Objectives and prospects The Group is in great shape. Our Construction order books are at record levelsand our Construction businesses are experiencing very strong markets allowing usto be highly selective in the work we undertake. Our Support Services businesshas reached new heights in terms of volume and profits and with the new awardsin 2007 and potential awards for 2008 we can expect increased growth in thecurrent financial year. In Homes the market continues to be sound and havingestablished a new operating region during the year we continue to look forfurther opportunities to expand the business. Our Property division has a goodportfolio of developments in the pipeline and is seeking to grow further throughstrategic acquisitions; and in PFI value will continue to be created from newand existing investments. With its strong markets, a sound business infrastructure and talented managementteams I have enormous confidence in the future prospects for Kier. Financial review Accounting policies The Group's annual consolidated financial statements have been prepared inaccordance with International Financial Reporting Standards. There have been nochanges in accounting policies during the year. Acquisitions On 31 July 2006 we acquired the shares in Hugh Bourn Developments (Wragby)Limited for a total adjusted consideration of £46.8m, after allowing forliabilities and the discount for deferred payments. £24.0m was paid during theyear, £12.9m was paid on 2 July 2007 and the balance is due on 1 July 2008. Theconsideration represented the market value of land, work in progress and otherassets and liabilities including 1,197 residential plots benefiting from acombination of outline and detailed planning consent. The business changed itsname to Kier Homes Northern during the period and completed 162 housing sales. Profit before tax Profit before tax increased by 31.3% to £77.6m (2006: £59.1m). This is statedafter deducting joint venture tax of £1.4m (2006: £1.4m) and before minorityinterests of £0.8m (2006: £nil). The share of minority interests relates to ourbuilding maintenance outsourcing contracts at Sheffield which is carried outthrough Kier Sheffield LLP in partnership with Sheffield City Council andrepresents their share of profits for the year. Taxation The Group's effective tax rate, including joint venture tax on joint ventureprofits, is in line with last year at 29.0% reflecting tax benefits relating tocontaminated land remediation and the effect of the corporation tax rate changeon deferred tax offset by permanent differences. Interest and cash The interest charge for the year comprises the following: Year to 30 June 2007 2006 £m £m Group interest receivable 6.9 5.3 Interest payable (2.6) (2.8) Unwinding of discount (4.6) (2.6) Share of joint venture interest (2.9) (2.6) (3.2) (2.7) The Group interest receivable includes that arising from average treasurybalances of £65m for the year. The charge of £4.6m relating to unwinding ofdiscounts includes £3.9m relating to land creditor balances payable over anumber of years (2006: £2.0m). Net cash at 30 June 2007 was £148.4m (2006: £111.2m) after deducting £30.2mrelating to loan notes. £114.8m was generated from operations during the yearafter deducting £11.0m (2006: £31.5m) in respect of special pensioncontributions made during the year. Cash, net of debt, at 30 June 2007 includes £44.3m (2006: £37.6m) of cash whichis not generally available for Group purposes, including that held by jointarrangements, overseas and by the Group's captive insurance company. The liquidcash position is affected by seasonal, monthly and contract-specific cycles. Inorder to accommodate these flows the Group maintains a range of bank facilitiesof £120.0m comprising £12.5m of overdraft facilities and £107.5m of committed,revolving credit facilities all on an unsecured basis. £15.0m of this expires inJanuary 2008 and £92.5m expires in January 2011. Treasury policy and risk management The Group has a centralised treasury function which manages funding, liquidityand financial risks. The Group's policy is to use the cash generated by theConstruction business to invest in the asset based Homes and Propertybusinesses. This financial model is supplemented with bank facilities amountingto £120m and long-term debt of £30m. The Group's financial instruments comprise cash and liquid investments. TheGroup, largely through its PFI and Property joint ventures, enters intoderivatives transactions (principally interest rate swaps) to manage interestrate risks arising from the Group's operations and its sources of finance. We donot enter into speculative transactions. There are minor foreign currency risks arising from operations. The Group has asmall number of branches and subsidiaries operating overseas in differentcurrencies. Currency exposure to overseas assets is hedged through inter-companybalances and borrowings, such that assets denominated in foreign currencies arematched, as far as possible, by liabilities. Where there may be further exposureto foreign currency fluctuations, forward exchange contracts are entered into tobuy and sell foreign currency. Balance sheet and total equity The balance sheet at 30 June 2007 includes intangible assets of £8.4m of which£7.7m relates to the outsourcing contract at Sheffield which is being amortisedover ten years, being the life of the contract, with £1.9m (2006: £1.9m) chargedto profits in the year; and £0.7m relates to Harlow, which was acquired duringthe year, after charging £0.1m to profit. Total equity has increased during the year to £183.0m (2006: £108.5m) asfollows: £m Total equity at 1 July 2006 108.5Profit for the year 56.3Dividends paid (9.8)Issue of shares 7.0Purchase of shares (8.7)Share-based payments 6.6Cash flow hedge* 9.4Net improvement in the pension deficit 14.1Translation differences (0.4)Total equity at 30 June 2007 183.0 \* This movement is driven by the increase in bond yields in the period 30 June2006 to 30 June 2007. Pensions The Group participates in two principal schemes, the Kier Group Pension Scheme,which includes a defined benefit section, and a defined benefit scheme on behalfof its employees in Kier Sheffield LLP. The financial statements reflect thepension scheme deficits and surpluses calculated in accordance with IAS 19. At30 June 2007 the net deficit under the Kier Group Pension Scheme was £21.9m(2006: £46.9m). The market value of the scheme's assets was £506.7m (2006:£467.0m) and the net present value of the liabilities was £537.3m (2006:£534.0m). The increase in liabilities represents an increase in the lifeexpectancy of members by one year offset by the effect of an improvement in bondyields. We have been addressing the issue of pensions over a period of several years andin the last three years have contributed £54.5m in special contributionsincluding £11.0m during the year to 30 June 2007 (2006: £31.5m). The specialcontributions have no effect on the income statement for the year, but are shownas a reduction in cash and a reduction in the pension deficit. Under the scheme relating to Kier Sheffield LLP there was a net surplus of £4.8mat 30 June 2006. This is being carried at £4.9m this year, based on the presentvalue of the economic benefit available in the form of reductions in futurecontributions to the plan and will be amortised over the remaining life of thecontract. Pension charges of £11.7m (2006: £16.9m) have been made to the income statementin accordance with IAS 19. Consolidated income statementfor the year ended 30 June 2007 2007 2006 Notes £m £mRevenueGroup and share of joint ventures 2 2,127.9 1,838.3Less share of joint ventures (62.5) (55.1)Group revenue 2,065.4 1,783.2Cost of sales (1,874.6) (1,623.7)Gross profit 190.8 159.5Administrative expenses (115.9) (103.5)Share of post tax profits from joint ventures 3.0 3.2Profit from operations 2 77.9 59.2Finance income 6.9 5.3Finance cost (7.2) (5.4)Profit before tax 2 77.6 59.1Income tax 3a (21.3) (16.2)Profit for the year 56.3 42.9Attributable to:Equity holders of the parent 55.5 42.9Minority interests 0.8 - 56.3 42.9Earnings per share 5- basic 155.0p 120.8p- diluted 152.9p 118.8pUnderlying earnings per share (excluding theamortisation of intangible assets)- basic 158.9p 124.8p- diluted 156.7p 122.7p Consolidated statement of recognised income and expensefor the year ended 30 June 2007 2007 2006 Notes £m £mForeign exchange translation differences (0.4) (0.3)Fair value movements in cash flow hedging instruments 13.1 4.1Actuarial gains on defined benefit pension schemes 22.5 30.0Deferred tax on items recognised directly in equity 3b (12.1) (10.2)Income and expense recognised directly in equity 23.1 23.6Profit for the year 56.3 42.9Total recognised income and expense for the year 79.4 66.5Change in accounting policyEffect of adoption of IAS 32 and IAS 39 on 1 July 2005 - (7.5)(with June 2005 not restated)on cash flow hedge reserveDeferred tax on above - 2.2 79.4 61.2Attributable to:Equity holders of the parent 78.6 61.2Minority interests 0.8 - 79.4 61.2 Consolidated balance sheetat 30 June 2007 2007 2006 Notes £m £mNon-current assetsIntangible assets 13.6 14.8Property, plant and equipment 83.4 78.5Investment in joint ventures 40.7 20.8Retirement benefit surplus 6.8 6.8Deferred tax assets 8.7 20.9Other financial assets 0.2 0.6Trade and other receivables 10.3 16.1Non-current assets 163.7 158.5Current assetsInventories 460.1 377.8Other financial assets 0.3 0.6Trade and other receivables 319.4 258.4Cash and cash equivalents 178.6 141.3Current assets 958.4 778.1Total assets 1,122.1 936.6Current liabilitiesTrade and other payables (791.8) (670.5)Tax liabilities (3.4) (2.7)Provisions (2.4) (0.9)Current liabilities (797.6) (674.1)Non-current liabilitiesLong-term borrowings (30.2) (30.1)Trade and other payables (50.0) (36.8)Retirement benefit obligations (30.6) (67.0)Provisions (20.2) (18.1)Deferred tax liabilities (10.5) (2.0)Non-current liabilities (141.5) (154.0)Total liabilities (939.1) (828.1)Net assets 2 183.0 108.5EquityShare capital 0.4 0.4Share premium 27.0 20.0Capital redemption reserve 2.7 2.7Retained earnings 145.7 88.0Cash flow hedge reserve 7.0 (2.4)Translation reserve (0.6) (0.2)Equity attributable to equity holders of the parent 182.2 108.5Minority interests 0.8 -Total equity 6 183.0 108.5 Consolidated cash flow statementfor the year ended 30 June 2007 2007 2006 Notes £m £mCash flows from operating activitiesProfit before tax 77.6 59.1Adjustments Share of post tax profits from joint ventures (3.0) (3.2) Normal contributions to pension fund in excess (2.9) (0.2) of pension charge Share-based payments charge 3.9 1.1 Amortisation of intangible assets 2.0 1.9 Depreciation charges 15.0 13.5 Profit on disposal of property, plant & (0.7) (1.1) equipment Net finance cost 0.3 0.1Operating cash flows before movements in working capital 92.2 71.2Special contributions to pension fund (11.0) (31.5)Increase in inventories (20.1) (49.3)Increase in receivables (54.4) (26.7)Increase in payables 104.9 131.8Increase in provisions 3.2 1.1Cash inflow from operating activities 114.8 96.6Dividends received from joint ventures 0.6 1.3Interest received 6.8 5.3Income taxes paid (16.9) (11.3)Net cash generated from operating activities 105.3 91.9Cash flows from investing activitiesProceeds from sale of property, plant & equipment 1.5 4.6Proceeds from sale of investments - 1.4Purchases of property, plant & equipment (19.7) (23.2)Acquisition of subsidiaries, including net borrowings 7 (28.0) (10.1)acquiredInvestment in joint ventures (7.7) (0.6)Net cash used in investing activities (53.9) (27.9)Cash flows from financing activitiesProceeds from the issue of share capital 3.1 -Purchase of own shares (8.7) (2.0)Interest paid (2.6) (2.7)Dividends paid (5.9) (6.2)Net cash used in financing activities (14.1) (10.9)Increase in cash and cash equivalents 37.3 53.1Opening cash and cash equivalents 141.3 88.2Closing cash and cash equivalents 178.6 141.3Reconciliation of net cash flow to movement in net fundsIncrease in cash and cash equivalents 37.3 53.1Increase in long-term borrowings (0.1) -Opening net funds 111.2 58.1Closing net funds 148.4 111.2Net funds consist of:Cash and cash equivalents 178.6 141.3Long-term borrowings (30.2) (30.1)Net funds 148.4 111.2 Notes to the consolidated financial statements 1. Accounting policies There have been no changes to the accounting policies in these financialstatements. They have been prepared in accordance with International FinancialReporting Standards as adopted by the EU. 2 Turnover, profit and segmental information For management purposes the Group is organised into five operating divisions,Construction, Support Services, Homes, Property and Infrastructure Investment.These divisions are the basis on which the Group reports its primary segmentalinformation. Support Infrastructure Construction Services Homes Property Investment Centre Group £m £m £m £m £m £m £mYear to 30 June 2007RevenueGroup and share of 1,411.2 315.5 325.1 61.3 14.8 - 2,127.9joint venturesLess share of joint - - - (48.7) (13.8) - (62.5)venturesGroup revenue 1,411.2 315.5 325.1 12.6 1.0 - 2,065.4ProfitGroup operating profit 21.9 10.2 47.4 6.9 (1.1) 10.4) 74.9Share of joint - - 0.4 5.2 1.7 - 7.3ventures' operatingprofitGroup and share of 21.9 10.2 47.8 12.1 0.6 (10.4) 82.2joint venturesShare of joint - - - (1.7) (1.2) - (2.9)ventures - financecost- tax - - (0.1) (1.1) (0.2) - (1.4)Profit from operations 21.9 10.2 47.7 9.3 (0.8) 10.4) 77.9Finance income/(cost) 16.2 0.3 (14.9) (1.7) 1.5 (1.7) (0.3)Profit before tax 38.1 10.5 32.8 7.6 0.7 (12.1) 77.6Balance sheetInvestment in joint - - - 26.0 14.7 - 40.7venturesOther assets 325.2 95.0 418.8 35.9 0.6 27.3 902.8Total liabilities (603.0) (96.4) (123.3) (4.5) (4.8) (76.9) (908.9)Net operating assets/ (277.8) (1.4) 295.5 57.4 10.5 (49.6) 34.6(liabilities)Cash, net of debt 361.2 15.8 (163.9) (36.8) (7.6) (20.3) 148.4Net assets 83.4 14.4 131.6 20.6 2.9 (69.9) 183.0 On 29 September 2006 Kier Residential Limited issued £50.0m of shares to KierGroup plc as part of the refinancing of the Homes division. This has increasedthe net assets of the Homes division with a corresponding reduction in theCentre and no overall impact on the Group. Support Infrastructure Construction Services Homes Property Investment Centre Group £m £m £m £m £m £m £mYear to 30 June 2006RevenueGroup and share of 1,218.1 281.3 277.9 47.5 13.5 - 1,838.3joint venturesLess share of joint (2.6) - - (40.0) (12.5) - (55.1)venturesGroup revenue 1,215.5 281.3 277.9 7.5 1.0 - 1,783.2ProfitGroup operating profit 17.2 6.8 41.6 4.2 (2.1) (11.7) 56.0Share of joint 0.8 - - 5.0 1.4 - 7.2ventures' operatingprofitGroup and share of 18.0 6.8 41.6 9.2 (0.7) (11.7) 63.2joint venturesShare of joint ventures - - - (2.1) (0.5) - (2.6)- finance cost- tax (0.1) - - (0.8) (0.5) - (1.4)Profit from operations 17.9 6.8 41.6 6.3 (1.7) (11.7) 59.2Finance income/(cost) 13.7 (0.5) (13.1) (0.9) 1.2 (0.5) (0.1)Profit before tax 31.6 6.3 28.5 5.4 (0.5) (12.2) 59.1Balance sheetInvestment in joint - - - 21.7 (0.9) - 20.8venturesOther assets 281.3 77.3 351.1 22.9 0.8 41.1 774.5Total liabilities (496.6) (78.2) (112.3) (5.2) (3.2) (102.5) (798.0)Net operating assets/ (215.3) (0.9) 238.8 39.4 (3.3) (61.4) (2.7)(liabilities)Cash, net of debt 298.7 12.5 (165.8) (23.8) (3.8) (6.6) 111.2Net assets 83.4 11.6 73.0 15.6 (7.1) (68.0) 108.5 Net operating assets represent assets excluding cash, bank overdrafts, long-termborrowings and interest-bearing inter-company loans. 3. Income tax a) Recognised in the income statement 2007 2006 £m £mCurrent tax expenseUK corporation tax 16.1 7.6Overseas tax 1.5 0.8Adjustments for prior years (0.5) (3.9)Total current tax 17.1 4.5Deferred tax expenseOrigination and reversal of temporary differences 4.1 7.2Effect of change in tax rate (1.0) -Adjustments for prior years 1.1 4.5Total deferred tax 4.2 11.7Total income tax expense in the income statement 21.3 16.2Reconciliation of effective tax rateProfit before tax 77.6 59.1Add : tax on joint ventures 1.4 1.4Underlying profit before tax 79.0 60.5Income tax at UK corporation tax rate of 30% 23.7 18.2Non-deductible expenses 1.7 0.5Tax reliefs on expenses not recognised in the income statement (2.6) (1.4)Rate change effect on deferred tax (1.0) -Profits attributable to minority interest not taxable (0.2) -Effect of tax rates in foreign jurisdictions 0.3 -Under provision in respect of prior years 0.8 0.3Total tax (including joint ventures) 22.7 17.6Tax on joint ventures (1.4) (1.4)Group income tax expense 21.3 16.2 b) Recognised in the statement of recognised income and expense 2007 2006 £m £mDeferred tax expenseFair value movements on cash flow hedging instrumentsGroup (0.2) -Joint ventures 3.9 1.2Actuarial gains on defined benefit pension schemes 8.4 9.0Total income tax expense in the statement of recognised income and 12.1 10.2expense Included within the above charge is £1.5m (2006: nil) arising from the effect ofthe change in the rate of UK corporation tax from 30% to 28% in April 2008. 4. Dividends Amounts recognised as distributions to equity holders in the year. 2007 2006 £m £mFinal dividend for the year ended 30 June 2006 of 17.8 pence (2005: 6.3 5.4 15.2 pence)Interim dividend for the year ended 30 June 2007 of 9.6 pence (2006: 3.5 2.9 8.2 pence) 9.8 8.3 The proposed final dividend of 40.4 pence (2006: 17.8 pence) had not beenapproved at the balance sheet date and so has not been included as a liabilityin these financial statements. The dividend totalling £14.6m will be paid on4 December 2007 to shareholders on the register at the close of business on28 September 2007. A scrip dividend alternative will be offered. 5. Earnings per share A reconciliation of profit and earnings per share, as reported in the incomestatement, to underlying and adjusted profit and earnings per share is set outbelow. The adjustments are made to illustrate the impact of the amortisation ofintangible assets. 2007 2006 Basic Diluted Basic Diluted £m £m £m £mEarnings (after tax and minority interests), being net 55.5 55.5 42.9 42.9profits attributable toequity holders of the parentAdd : amortisation of intangible assets 2.0 2.0 1.9 1.9Less : tax on amortisation of intangible assets (0.6) (0.6) (0.5) (0.5)Adjusted earnings 56.9 56.9 44.3 44.3 million million million millionWeighted average number of shares 35.8 35.8 35.5 35.5Weighted average number of unexercised options - - - - 0.3dilutive effectWeighted average impact of LTIP - 0.5 - 0.3Weighted average number of shares used for earnings 35.8 36.3 35.5 36.1per share pence pence pence penceEarnings per share 155.0 152.9 120.8 118.8Adjusted earnings per share (excluding the 158.9 156.7 124.8 122.7amortisation of intangible assets) 6. Reconciliation of changes in shareholders' equity 2007 2006 £m £mOpening shareholders' equity 108.5 52.8Adjustments on adoption of IAS 32 and IAS 39 on 1 July 2005 (net of - (5.3)tax)Restated opening shareholders' equity 108.5 47.5Recognised income and expense for the year 79.4 66.5Dividends paid (9.8) (8.3)Issue of own shares 7.0 2.1Purchase of own shares (8.7) (2.0)Share-based payments 3.9 1.1Deferred tax on share-based payments 2.7 1.6Closing shareholders' equity 183.0 108.5 7. Summary of acquisitions 2007 2006 £m £mConstruction and building services operations of:Sheffield City Council 1.4 1.6Harlow Council 1.0 -Hugh Bourn Developments (Wragby) Limited:Consideration paid 24.0 -Net borrowings on acquisition 1.6 -Ashwood Homes: consideration paid - 8.5Total 28.0 10.1 8. Statutory accounts The information set out above does not constitute statutory accounts for theyear ended 30 June 2007 or 2006 but is derived from those accounts. Statutory accounts for 2006 have been delivered to the Registrar of Companiesand those for 2007 will be delivered following the Company's Annual GeneralMeeting. The auditors have reported on those accounts, their reports wereunqualified and did not contain statements under section 237 (2) or (3) of theCompanies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Kier