Falling UK Spending And Rising Costs Will Hinder Pipeline Progress

Key Takeaways

• Declining public infrastructure spending and regulatory burdens threaten future revenue growth and margins, as compliance and operational costs continue to rise.
  
• Labour shortages, pension obligations, and supply chain volatility are putting sustained pressure on project costs, margin stability, and investment flexibility.
  
• Strong public sector order book, disciplined risk management, and strategic investment underpin stable revenue, resilient margins, and enhanced shareholder returns amid ongoing sector tailwinds.

Catalysts

Primarily engages in the construction business in the United Kingdom and internationally.

• A long-term decline in UK public infrastructure spending due to persistent fiscal pressures and government debt overhangs threatens Kier's core pipeline, with recent delays to key rail (CP7) and highways (RIS 3) investment cycles highlighting ongoing uncertainty for future revenue growth.
  
• Increasingly stringent environmental regulations and the global move toward decarbonization are set to add significant compliance and operational costs, creating sustained pressure on margins as Kier takes on more climate-conscious projects with higher capital requirements and greater regulatory risk.
  
• Persistent industry-wide labour and skills shortages, coupled with rising wage inflation, are likely to drive up project costs further, risking margin compression especially as fixed-price contracts limit the ability to pass these costs on to clients.
  
• Ongoing legacy issues tied to pension deficits and past debt significantly constrain Kier Group's balance sheet flexibility, and the need to allocate cash to fund pensions and repay borrowings could restrict future investment and return potential, directly impacting net earnings growth.
  
• Continued exposure to volatile raw material costs and ongoing global supply chain instability raise the risk of future cost overruns and project delays, with profit reliability and gross margins at risk if Kier cannot fully offset these impacts through contract terms or operational excellence.

Kier Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kier Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kier Group's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach £99.4 million (and earnings per share of £0.21) by about August 2028, up from £51.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 17.2x today. This future PE is lower than the current PE for the GB Construction industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.34%, as per the Simply Wall St company report.

Kier Group Future Earnings Per Share Growth

Risks

• The company reports a record £11 billion order book with nearly all of FY25 revenue secured, underpinned by long-term framework agreements and a strong presence in UK government and regulated industry contracts, which provides multiyear revenue visibility and reduces the risk of revenue shortfalls.
  
• Kier Group continues to deliver revenue growth and improved cash generation, achieving a net cash position of £58 million and materially reducing average month-end net debt, which supports increasing dividends and share buybacks, enhancing shareholder returns and strengthening the balance sheet for future earnings stability.
  
• The Infrastructure Services segment is positioned to benefit from the AMP8 water investment cycle, which is set to double to £104 billion, and Kier is a key Tier 1 contractor on 15 frameworks, meaning sector trends such as population growth, aging infrastructure, and environmental regulation are likely to drive revenue growth and margin resilience.
  
• The company is strategically investing in its Property division, targeting a return on capital employed of 15 percent, maintaining a diversified and liquid investment portfolio, and leveraging market recovery and joint venture opportunities to smooth returns, supporting long-term earnings growth.
  
• Disciplined risk management practices, including a high proportion of cost-reimbursable and two-stage negotiated contracts, help Kier to mitigate inflation and supply chain volatility, providing better operational control and supporting consistent net margins and profit reliability over economic cycles.

Valuation

• The assumed bearish price target for Kier Group is £2.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kier Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.22, and the most bearish reporting a price target of just £2.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £4.6 billion, earnings will come to £99.4 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of £1.99, the bearish analyst price target of £2.0 is 0.4% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.