The Kier (LSE: KIE) and Purplebricks (LSE: PURP) share prices are trading well below their 52-week highs, down 82% and 38%, respectively. However, both have enjoyed a bit of a post-election bounce. Could this be the start of a major revival, with a big upside for buyers today?
Tacit admission
Last week’s half-year results from Purplebricks did nothing to dispel my belief its no-sale-still-pay business model is deeply flawed. I’ve long been convinced its rising marketing spend to persuade new punters to take a gamble is unsustainable. And that negative word-of-mouth from sellers who handed over cash for no result would ultimately undermine the business.
In the six months ended 31 October, Purplebricks reduced its UK marketing spend to £12.3m from a record high of £13.5m in the same period last year. UK instructions and revenue both fell, the latter to £47.1m from £48.4m.
Purplebricks announced it’ll be field-testing different pricing methods in early 2020, “with some reducing the level of up-front fee and splitting the payment between publication and completion.” I view this as a tacit admission the existing business model is broken.
Its newer business in Canada managed to increase revenue to £17.7m from £15.2m, but this came with a marketing spend ramped up to £4.2m from £3.2m. I can only see Canada following the same trajectory as Purplebricks UK in due course.
Unconvinced
At a share price of 117.4p, the group is valued at £360m. This is almost three times a City consensus revenue forecast of £121m on which a £6.4m pre-tax loss is expected. I think the valuation is far too high for a business I’m wholly unconvinced is capable of generating profitable growth. As such, I’m happy to avoid the stock until I see evidence to the contrary.
Dirt cheap
Kier’s valuation is a huge contrast to that of Purplebricks. With a share price of 96p, and market capitalisation of £156m, it’s valued at just 0.04 times City analysts’ forecast revenue of £4,268m. Furthermore, unlike the unprofitable property-listing agent, Kier is forecast to post a pre-tax profit of £89m and positive earnings per share of 44p, giving it a price-to-earnings ratio of 2.2.
On the face of it, Kier is dirt cheap. Unfortunately, successful investing isn’t quite as straightforward as simply buying stocks trading at the lowest revenue and earnings multiples. Indeed, when they’re as low as Kier’s 0.04 times revenue and 2.2 times earnings, our first response should not be to hit the buy button, but question why the valuation is so low.
Close watch
Kier also has a debt problem. Year-end net debt at 30 June was £167m, with average month-end net debt of £422m. It also has substantial off-balance sheet debt. Management is doing what all companies do when severely constrained by debt. Namely, cutting costs and trying to raise cash by selling some of its assets.
In this kind of situation, if you simply believed every management team that said it was confident about its turnaround strategy, you’d end up investing in wipe-outs like Carillion and Thomas Cook. I’d want to see tangible evidence of falling debt and improving business performance before getting involved with Kier. As such, I’d avoid the stock for the time being, but keep a close watch on developments in 2020.
