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The FTSE 250 has been making some headway recently, helped by improving investor sentiment and a slightly brighter economic outlook for the UK. While the FTSE 100 grabs most of the headlines, the mid-cap index often harbours hidden opportunities with better growth prospects, especially for value investors who care to look closer.
One that caught my attention recently is Kier Group (LSE: KIE), a relatively small (£760m) business that recently rejoined the FTSE 250. The construction and infrastructure firm has had a tough few years, but there are signs it might finally be turning the corner.
A steady recovery
Kier has carried out a slow but notable restructuring since its debt-fuelled troubles back in 2019. It’s made the tough decisions to sell off parts of the business, cut jobs and refocus on its core operations. The process has been slow but recent results suggest the hard work could be paying off.
For the year ending June 2024, Kier reported revenue of £3.9bn, up from £3.4bn the year before. Pre-tax profit improved to £68m from £52m and perhaps most importantly, it managed to cut its debt in half — debt being an issue that was weighing heavily on investor confidence.
With things looking up, it has reintroduced dividends and launched a £20m share buyback programme — signalling a strong commitment to shareholder returns. The yield is a modest 3.2% for now but if prior growth is anything to go by, it should rise steadily over time.
Looking ahead
Kier’s recovery seems to have only just begun, which could be both beneficial and risky. Construction is not only a cyclical sector at the whim of the housing market but also one that often struggles with thin margins. A slowdown in government infrastructure spending or delays to key projects could quash hopes of a rapid recovery. For now however, the UK seems to be pushing ahead on long-term transport and energy projects, so there’s a clear pipeline of potential work.
Kier also picked up parts of the collapsed Buckingham Group last year, strengthening its position in rail infrastructure. That could open new opportunities as Network Rail and other bodies look to upgrade the country’s transport links. On the other hand, it could be an expensive new project for the company that might end up costing more than it’s worth.
Should investors take a closer look?
Kier’s share price is still well below where it was a few years ago, but that also means the valuation isn’t stretched. With earnings per share (EPS) around 10p and the price at £1.70, it’s trading at 17 times earnings — only slightly above average. If management can keep delivering and avoid the mistakes of the past, it might have decent growth potential.
Admittedly, the FTSE 250 is full of companies at different stages of growth and recovery, so its position isn’t particularly rare. Off the top of my head, Chemring and B&M European Value Retail also look like promising undervalued stocks right now. However, Kier certainly looks like one of the more interesting turnaround stories right now, so it’s one that income-focused investors might want to consider.
