The last time I covered Kier (LSE: KIE) shares was in mid-June 2019. At the time, the stock looked cheap. However, it was clear the company had some serious challenges to work through. As a result, I said the best move was to avoid the stock.
Fast forward to today. Kier’s share price is now nearly 30% lower than it was in mid-June last year. So, avoiding the stock was definitely the right move. Has the outlook for Kier improved since my last article? Let’s take another look at the investment case.
Kier shares: an encouraging trading update
Kier’s most recent trading update, issued on 1 July, was relatively encouraging, in my view. While the company said Covid-19 had adversely affected the group’s revenue and resulted in additional costs, it also said its underlying performance recently had “remained resilient.”
It added that due to the strength of the group’s orderbook (£7.6bn at 31 May), its expertise in managing complex projects, and its long-standing client relationships, it remained confident in its outlook for the financial year ending 30 June 2021.
This update suggests to me that since my article, Kier has made some progress in terms of turning things around.
Insiders have been buying
It’s also encouraging to see that some insiders have purchased Kier shares in recent months. Back in March, they included CEO Andrew Davies, CFO Simon Kesterston, and chairman Matthew Lester buying KIE shares. While the purchases weren’t huge, I still see this kind of insider transaction activity as relatively bullish.
The shorters have backed off
It’s also worth noting that shorters (hedge funds betting against Kier shares) have really backed off recently. Back in 2018, Kier was one of the most shorted stocks on the LSE. For example, in September 2018, short interest was a worryingly high 18%, suggesting that many hedge funds were expecting the stock to fall. Today though, short interest is just 1.2%, according to shorttracker.co.uk. This indicates the outlook for Kier has improved.
Red flags
However, there are still some red flags here. One is the company’s debt level. In its most recent trading update, the group advised its average month-end net debt for the current financial year is expected to be approximately £440m. Given that equity on the balance sheet at 31 December was £519m, that’s quite high. Having a high level of debt in the current economic environment isn’t ideal.
Another red flag is that brokers continue to downgrade their earnings forecasts. Over the last three months, the consensus earnings per share forecast for this year has fallen about 10%.
Kier share price: my view
Weighing everything up, I’m starting to see some appeal in Kier shares. The valuation is low (forward P/E ratio of just 2.1) and the company looks to be turning things around.
I wouldn’t buy the stock myself, as I prefer to invest in high-quality businesses that are highly profitable and very resilient. However, as a turnaround play, I do think the stock is starting to look interesting.
