Following the close of its 2019 financial year, troubled outsourcing and construction business Kier Group (LSE: KIE) published an update this morning on the progress of its turnaround. The company only announced its strategic overhaul on 17 June so, at this point, I think it’s too early to tell if these initiatives are paying off.
However, the update does give us some insight into how the business is faring in the current market environment. According to the management report, trading at the group’s key Infrastructure Services and Buildings divisions has remained “resilient” but turnover for the 2019 financial year is expected to be around £100m lower than the level reported for 2018.
The update notes this decline in revenue is due to “property and land-led transactions which did not complete in June 2019.” Management believes this will have an impact on the group’s bottom line “broadly in line with its historic gross margins.”
According to my research, the company has historically reported a gross profit margin of around 10%, which implies the drop in revenue will cost the group £10m in gross revenue for fiscal 2019. Analysts had been expecting Kier to report a net profit of £102m for the 2019 financial year, so this drop in revenue will have a significant impact on the bottom line.
Debt under control
On a positive note, Kier’s report tells us the company seems to have got its debt problem under control. Its average month-end net debt for the 2019 financial year was £422m, that’s at the bottom end of previous guidance of £420m-£450m.
That said, as I’ve noted before, Kier’s debt situation could be worse than reported because the company has historically had a lot of off-balance-sheet obligations. So while it may look as if the firm is heading in the right direction, I’d like to see a further, meaningful decrease in the average per month-end debt figure before I can trust the balance sheet.
Moving in the right direction
Overall, the latest trading update from Kier seems to suggest the enterprise is making progress drawing a line under past mistakes. While the decline in revenue is disappointing, the debt situation appears to be under control. On top of this, the group says it has received “significant interest” in Kier Living, its housebuilding division, which it’s trying to offload to reduce debt. The sale of this business would be a significant step forward.
Nevertheless, until the company shows us it has made concrete progress on its plans to restructure, strengthen its balance sheet, and return to growth, I’m going to stay away from the shares. There’s still plenty that could go wrong over the next 12 to 24 months as management tries to stabilise operations. Any move in the wrong direction could end up with the group having to ask shareholders additional funds.
All in all, I reckon it’s better to watch from the sidelines and wait until Kier’s situation improves before investing.
