When I last covered Kier (LSE: KIE) shares, on 8 July, I said that they were starting to look interesting as a turnaround play. The company had just released an encouraging trading update, and the short sellers had backed off the stock.
However, I also noted that there were a few issues that concerned me. Kier’s high level of debt was one. Analysts’ earnings downgrades were another. So, I wasn’t prepared to rate Kier shares as a ‘buy’.
In hindsight, that was the right decision. Since my article, the shares have fallen from 78p to 50.6p – a decline of 35%. So, why has Kier’s share price fallen recently? And what’s my view on the stock now?
Why has Kier’s share price fallen?
One reason the share price has continued to fall recently is that full-year results published on 17 September were quite disappointing.
These results, which the group said reflected “nine months of good strategic progress and three months’ impact of Covid-19,” showed a drop in operating profit of 52% and a fall in adjusted basic earnings per share (EPS) of 50%. They also showed an 86% increase in net debt to £310.3m.
“This financial year has been a difficult one for the group,” commented CEO Andrew Davies. Looking at these results, it’s clear that the company has been impacted significantly by Covid-19.
Another reason Kier’s share price has fallen is that City analysts have continued to lower their EPS forecasts for this year. Over the last month, for example, the consensus EPS forecast has fallen 11% to 33.3p. Earnings downgrades tend to put downward pressure on a company’s share price.
My view on Kier shares now
In light of the recent developments here, I see Kier shares as quite risky at present.
One issue that concerns me is the high level of debt. At 30 June, Kier had total equity on its balance sheet of £240.8m. So, its net debt-to-equity ratio (£310.30/£240.80) is 1.3. That’s a little too high for my liking.
I’ll point out that Stockopedia gives Kier an ‘Altman Z2’ score (this is a measure of financial strength) of -1.65. This indicates a ‘serious risk of financial distress’ within the next two years.
Another thing that concerns me a little bit is that no directors have purchased Kier shares in recent months. Even when the share price fell below 50p, no insiders stepped up to buy shares. This suggests that Kier shares may not be a bargain even at the current low price-to-earnings (P/E) ratio of just 1.5.
All things considered, I think the shares are best avoided for now. They may rebound at some stage. However, in my view, there is still risk to the downside.
Why take a huge risk on Kier shares when there are so many great companies you could invest in right now?