Kier Construction

The Construction division encompasses our UK regional contracting, civil engineering and overseas businesses, which are highly skilled in the construction of the full range of building projects, together with power, waste, nuclear and infrastructure facilities and rail and mining projects. The division now includes a newly formed Process & Engineering business which provides mechanical and electrical (M&E) design and delivery services to grow our in-house M&E capability. Through the development of our own 4D building information modelling (BIM) processes, we are at the forefront of the industry and are ready to respond to the Government’s Construction Strategy which will require the use of this technology in the future.

Revenue in Construction was 2% above last year, at £1,445m (2010: £1,417m), with modest growth in our UK revenues. Operating profit increased to £39.3m from £36.2m, at an improved 2.7% margin, ahead of last year’s 2.6%. The margin performance was underpinned by excellent cash generation with a year-end cash balance at a record £423m (2010: £418m). Contract awards were higher than last year with 68% arising from our numerous frameworks and collaborative bidding arrangements. These awards have provided us with a secured order book amounting to £1,386m (2010: £1,320m), together with £859m of probable awards, comprising contracts on which we are preferred bidder or are in one-to-one negotiations (2010: £723m). In total, we are active on over 70 frameworks across the UK through which clients continue to procure a significant element of their work with a focus on quality and whole life-cycle costs.

56% of our awards were for public sector projects (2010: 74%). The transition from public sector to private sector is a trend that will continue and we expect to see the proportion of public sector work drop to less than 50% over the next year.

Of the public sector awards, many continue to be in the education sector, which accounted for 33% of awards (2010: 41%). Our education projects included six completed academies (£150m); another eight academies are on schedule to be handed over in the next 12 months and a further 11 academies (£180m) are progressing towards financial close. We have responded to the Government’s ‘more for less’ initiative with innovative design solutions, leaving us well placed to target the 70 further academies (£1.0bn) approved under the framework.

Our health sector revenue continues to grow and is approaching £100m per year. The sector represented 6% of our 2011 awards and a notable milestone was securing a position on the successful ProCure 21+ framework. In the first nine months of the framework, Kier has been selected to deliver up to £110m of healthcare projects, with a further £200m of opportunities to pursue before the end of the 2011 calendar year.

In the private sector, the commercial, power and waste sectors are providing us with the most significant opportunities, particularly in London and the south-east in the case of the commercial sector.

During the year, we secured circa £150m of commercial building projects, including the £45m Howick Place development for Terrace Hill and £57m of schemes for Coca-Cola and Pontsarn Properties in Uxbridge and Fetter Lane, Holborn. We are preferred bidder on a further two schemes for the developer, Argent, at King’s Cross, with a combined value of £110m, and for a £70m medical facility for UCL.

Contracts awarded and market predictions
Sector	2010 awards £1.4bn	Previous prediction	2011 awards £1.5bn	Likely impact 2012 & 2013
Education	41%		33%
Transportation (rail + airports)	3%		13%
Overseas	1%		13%
Commercial	4%		10%
Residential/accomodation	2%		9%
Health	7%		6%
Retail	4%		4%
Industrial	3%		3%
Hotels/leisure	5%		3%
Custodial	23%		2%
Mixed use	1%		1%
Defence	4%		0%
Power and waste*	0%		0%
Other (inc. utilities)	2%	N/A	3%	N/A
* Whilst there were no awards in 2011, we have £150m at Preferred Bidder stage: two key waste contracts and expected awards in the power sector

During the year we have been particularly successful in the transport sector, which accounts for over 13% of the division’s contract awards. We were successful in securing contracts on the Crossrail programme (in joint venture) winning the C300/410 Western Tunnels and Station Caverns at Tottenham Court Road and Bond Street valued at £500m, and subsequently the station enabling works contracts at Liverpool Street and Whitechapel, valued at approximately £50m. We are continuing to tender for major works schemes on the Crossrail programme.

We have also secured the station development contract at Epsom Station and are named preferred bidder at Twickenham Station for Solum Regeneration, our joint venture with Network Rail, valued at £40m. Our rail project to replace the roof at King’s Cross Station, a Grade I listed structure, is on track for completion ahead of the Olympic Games.

The energy sector remains a key focus for our plans and we expect significant activity in this area as the UK’s ageing fleet of power stations is replaced over the next ten years. Our operations in the sector include our 14th combined cycle gas turbine power station for EDF Energy (EDF) at West Burton (£130m), which completed during the year. We have also been awarded the £50m contract to build an energy-from-waste plant in Plymouth for MVV and South Devon Waste Partnership and we are preferred bidder for a new £45m waste treatment facility at Wakefield and have been short-listed in the tender process for the Peterborough waste project.

At Hinkley in Somerset, we are the first contractor, in joint venture, to commence advance works on site for EDF’s planned new nuclear power station. Our joint venture is short-listed for a number of major packages of work on this scheme totalling in excess of £400m. In the nuclear market, we also continue to deliver projects at Aldermaston and Sellafield, and we see a number of other opportunities coming to tender in this sector with significant barriers to entry.

Overseas, our key markets are growing and a number of major awards have been secured during the year, representing 13% of the division’s total contract awards.

In Hong Kong, we have secured approximately £320m of work, in joint venture, for the Mass Transit Railway Corporation (MTRC) and prospects in the territory remain encouraging. A number of further contracts with the MTRC are being selectively targeted together with other government infrastructure works. Our business in the Caribbean has enjoyed a particularly good year, winning over £35m of work in the period, with a strong pipeline of future prospects in its key sectors.

In Saudi Arabia, we have completed two years of an eight-year phosphate mining contract for our client, Ma’aden. We are pursuing further opportunities as the Saudi mining sector expands. We are also bidding in joint venture for some significant railway development projects planned in the region. Despite the challenging economic environment in the Middle East, we remain assured of the longer-term potential in the region and anticipate a period of sustained and profitable growth.

Notwithstanding the excellent position we are in with a strong forward workload there is a significant shift in spending patterns from public sector social infrastructure projects to private sector and areas of regulated spend. Companies like Kier, with a broad capability and skills to adapt to these growing markets, are well placed to access a healthy pipeline of quality opportunities. Competition for the declining public sector workload is increasing and our focus remains on securing quality work through frameworks and targeting the power, waste and nuclear markets and commercial building projects from our long-term customers. The power market alone, in which we are a leading player, is likely to provide us with over £13bn of opportunities over the next ten years and we are already winning work in this sector.

Our mix of work has shifted from 74% to 56% for the public sector in the last year and we expect this to continue such that our public sector work will decrease to less than 50% over the next 12 months. However, we expect to maintain a good proportion of the work from the public sector, as evidenced by our appointment in September 2011 as sole contractor to deliver up to £1.0bn of construction projects over four years on behalf of Scape, a local authority alliance. It is estimated we will be carrying out over 2,500 projects in this national framework across education, police, leisure, residential and other civic services with assistance from our Services division.

Overall Kier Construction is well positioned in its key markets. The division has a diversity of skills, which is one of its key strengths, and this has enabled it to grow its order book during the current financial year while maintaining its selective bidding processes.

The order book (secured and probable) stands at £2.3bn (June 2010: £2.1bn) and represents 95% of the division’s targeted revenue for 2012 and 46% of its targeted revenue for 2013, which is slightly ahead of normal, and we expect our operating margins to remain firmly above 2%.