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Kier share price: A bargain or one to avoid? Here’s what I think

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Diggers and trucks in a coal mine
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Kier Group (LSE:KIE) is one of a number of construction companies that have been affected by the Covid-19 pandemic. Many sites were closed as a result of the lockdown.

As restrictions have begun to ease, sites have now reopened, and construction has begun once more. It is worth noting that Kier is a major player in the industry. There is a good chance you will have visited a facility built by them or used a service installed by Kier. Some of their projects include museums, office buildings, rail networks, retail outlets, and fibre broadband installations.

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Kier is an interesting stock as it’s share price has plummeted in recent times. At such a current cheap price, is this a bargain stock with bounce back potential or one to avoid?

Share price woes

Kier’s share price has decreased by over 90% in the last five years. In July 2015, it stood at over 1,400p per share. As I write this, its price is just above 70p. In more recent times, Kier’s share price is down over 12% from this time last year. Before arriving at its current price, its share price had begun to recover somewhat, close to 150p in February of this year. Unfortunately due to the crash, prices across the markets tumbled.

A noteworthy point for potential investors is that some insiders have been purchasing shares recently. In March, CEO Andrew Davies, CFO Simon Kesterson, and Chair Matthew Lester all purchased shares in KIE.

Trading update

KIE released a trading update on 1 July that I found mostly positive. The update confirmed that 80% of Kier’s sites remained open during the lockdown period. Due to this, its performance remained resilient. Kier confirmed almost all sites are now back open.

One of the major takeaways from the update for me was Kier’s order book value. As at 31 May 2020, the order book’s value stood at £7.6bn. Of this amount, 60% were in government contracts and 25% to regulated entities. Government contracts are always a positive sign for me as the government will pay its bills on time. Other positive segments from the update pointed towards new projects such as multiple hospitals and a ‘notice to proceed’ on the HS2 project.

My verdict on Kier

Kier is an integral part of the government’s plan to spend £100bn on new infrastructure projects across the country. Despite this, and its extensive order book, there are too many negative factors for me.

One of my biggest concerns is the company’s debt levels. In the trading update from July, KIE advised its average month-end net debt for the current year is expected to reach £440m. If you compare that against equity on the balance sheet at 31 December 0f £519m, that is very concerning. Debt in any economic climate is worrying, but especially in the current unpredictable climate.

Kier’s price-to-earnings ratio is rather low, sitting at just over 2. Brokers are continuing to downgrade their earnings forecast for KIE. 

Overall, I feel there is potential for things to turn around for Kier but it is one I would avoid and keep an eye on. There are other shares out there that offer a better level of safety and return than Kier in my opinion.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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