Kier Group (LSE:KIE) fell from grace in 2019 after a major profit warning, and its share price is yet to recover. The London construction and property firm has considerable debt and its earnings per share are negative. The Kier share price is trading at a 20-year low and is down 92% in 2 years. It enjoyed a short-lived spike in February but has since been languishing around 80p. Considering the economy is on a knife-edge, I don’t actually think the outlook for Kier is as bad as it once was.
Contracts and pay cuts
The group has won a contract with the University of Edinburgh to deliver the plans for a new school of engineering. This contract is expected to be worth around £22m. This week Kier also started construction of a new £15m leisure centre in Kirklees.
The company has a government contract to build the controversial HS2 high-speed rail enterprise. This should bring in £250m of revenue per annum over the next six years. Over 80% of its work is for the government, its agencies, or regulated entities. This means that most of its sites continue to operate in line with public health guidelines.
Last month, Kier cut the pay of all its 6,500 employees by between 7.5% and 25% of their base salaries. These cuts are among its cost-cutting efforts to target £65m in savings by the end of June 2021.
There has been much speculation about whether Kier Group will go bust as Carillion did in 2018. Anything is possible, as the pandemic wreaks havoc on the economy, and the country slides into recession. However, I think it is unlikely that the government would want a repeat of the Carillion embarrassment. That Kier is still bringing money in, winning contracts, and attempting to cut costs, makes me think it will probably survive.
Construction challenges
April was the worst month on record for the UK construction sector. Although things are picking up, there appears to be a temporary break in demand from some real estate sectors. Working practices will have to adjust to account for public health concerns, causing a slowdown in productivity.
The coronavirus pandemic has highlighted the pitfalls in long, complicated supply chains. It is likely that the government will want to reduce this by bringing more manufacturing and industry back home, particularly with Brexit reducing cross-border movement. Over 7% of Kier’s employees work as apprentices, graduates, sponsored students, or in further education. It sponsors several programmes to train newcomers to construction to fill the industry skills gap. This is a positive stance that I imagine the government will want to further encourage.
The massive government debt is accumulating daily as it scrambles to save entire sectors and keep the economy from collapsing. In time, this could lead to long-term inflation, whereby boosting growth and recovery could pave the way for the UK to escape the economic crisis. Government stimulus of building projects has historically helped in these situations. Unfortunately, this is likely still a long way off as inflation rates continue to fall for now.
Although I think investing in Kier carries risk, I also see reasons it could survive. I think the Kier share price will suffer some fluctuations in the road ahead, but these may not be as severe as previous price movements.
