If there’s one thing an investor finds hard to resist, it’s an unfairly depressed share price, and there must be a lot of people out there seeing Kier Group (LSE: KIE) as a possible bargain right now. I can see why.
Slump
Over the past 12 months, shares in the construction, services and property group have fallen by nearly 90%, putting them on a forward P/E multiple of under two. That’s the kind of valuation that institutional investors put on companies they expect to go bust, and the big question now is, can Kier Group escape the fate that befell fellow sector struggler Carillion which went into liquidation in January 2018.
But since 31 July, the price has almost doubled, so do the markets have this one wrong and should we be loading up with Kier Group shares? Before we jump in, it’s wise to be cautious — the shares are progressing from a very low level, and the concept of the dead cat bounce is very much a real one.
Results
All eyes will be on full-year results, due 19 September, but a pre-close update released on 1 August didn’t fill me with an urge to buy.
The big problem is the firm’s net debt, which stood at £167m at 30 June. That’s actually a nice figure, but it’s misleading taken on its own due to the lumpiness of cash movements in the construction business, and average month-end net debt stood at £422m.
That figure is at the low end of the firm’s earlier guidance of £420m-£450m, but it comes in a year when Kier expects to record a fall in revenue of around £100m since 2018’s £4.5bn. A drop of only 2% might not sound much, but with a low operating margin of 3.6%, Kier only managed to turn 2018’s revenue into a pre-tax profit of £137m — and I can’t see 2019’s profits being enough to make much of a dent in that debt mountain.
Costs
Kier is putting some serious effort into cutting costs, based on the usual measures of dumping non-core businesses and laying off workers, but there’s one thing I don’t like about what it didn’t do — it didn’t stop paying out cash as dividends a lot earlier.
Kier has been operating a progressive dividend policy, and its 2018 yield reached as high as 7.2% after being raised in line with inflation that year. That can be fine when a business is booming, and funding operations through high levels of debt can gear up profits for shareholders very nicely.
Outlook
But the outsourcing and construction business has been in a slump for years and is likely to remain tough for quite some time (and could get significantly worse if the government halts the HS2 rail project). I say Kier should have been focusing on its balance sheet, its costs and its debt years ago — and not waiting until there’s a last-minute panic. Why, oh why, do so many companies fall so short-sightedly into the same trap?
I reckon we’re looking at a cake or death situation, and though there could be very nice cake if Keir pulls it off, the risk of death is far too high. I still wouldn’t touch Kier shares with a bargepole.
