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Is the Kier share price too cheap?

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The value of the Kier (LSE: KIE) share price has fallen dramatically over the past five years. Since the beginning of 2016, shares in the group have fallen by around 93%

However, the group’s latest trading update suggests it’s made substantial progress rectifying historical issues. As such, I’ve recently been taking a closer look at this construction business.

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Thoughts on the Kier share price

Whenever I stumble across a business I think looks cheap and might be candidate for my portfolio, I always try to understand why the stock has acted in the way it has. 

Concerning Kier, I can understand why investors have avoided the business over the past few years. Since 2016, the group’s profitability has collapsed. And, within the last three years, the organisation has had to ask shareholders for £250m to keep the lights on. The company also eliminated its dividend to investors. 

I tend to avoid businesses that are losing money and need to raise more cash from shareholders. So, I can understand why the Kier share price has been falling since the beginning of 2016.

Nevertheless, the company’s performance has improved recently. Last week, it revealed statutory half-year profits would be “materially better” than a year ago. Lower one-off items helped keep the business in the black. What’s more, Kier said revenue would be “slightly above” the board’s expectations. The group also reported its order book would be at the £7.9bn year-end level after several contract wins.

Debt issues 

On the downside, the company reported it had average monthly debts of £436m in the period. This seems to be more than management is comfortable with. The group said it’s considering yet another equity raise in the same trading update. The proceeds may be used to strengthen the balance sheet. As I mentioned above, I tend to avoid businesses that need to raise money from investors. So, for me, this statement is concerning. 

That being said, if shareholders support the cash call, the additional capital could help Kier strengthen its balance sheet. This additional capital, coupled with the company’s “materially better” profits for 2020, may improve the Kier share price outlook.

A turnaround in progress

Based on the latest trading updates from a company, it looks as if Kier’s outlook is improving. However, the business isn’t out of the woods yet.

As it’s latest trading update shows, the business may need to raise additional capital from investors. This suggests that while group revenues and profits are performing better than expected, investors may not see positive returns from the stock any time soon. Still, if the organisation can get the capital raise off the ground, and put its balance sheet issues behind it, the Kier share price may have a brighter future. 

Personally, I wouldn’t feel comfortable supporting a business that’s made so many mistakes. However, there’s no guarantee these past issues will repeat themselves in future.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK 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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