The Kier (LSE:KIE) share price has had a rough couple of years. Due to a continual decline in profits, the stock has plummeted by nearly 95% since 2016. But recently, it finally started climbing again. What caused this sudden growth? And should I be adding this stock to my portfolio?
The rising Kier share price
Over the last five years, Kier racked up a lot of debt. But due to its already significant level of leverage, the management team also had to raise capital from shareholders and cut dividends to zero, just to keep the lights on.
Needless to say, this is not the hallmark of a healthy business. And the disruptions from Covid-19 didn’t exactly help matters. In fact, the Kier share price was still heading in a downward trajectory throughout most of 2020. But around the end of October, the stock suddenly started climbing again. And in the fourth quarter of last year, the share price increased by nearly 65%. What happened?
The firm published its full-year 2020 results. They weren’t exactly great, given both revenue and profits continued falling. However, there were some positive signs of recovery thanks to the restructuring process that is still underway. Free cash flow once again became positive, reaching £66m compared to -£89m in 2019. Meanwhile, the management team was able to achieve an annual cost saving of around £100m. And at the same time, Kier secured new contracts to push its order book up to £7.9bn by the end of June last year.
To me, this looks like the start of a potentially successful turnaround. And it seems investors agree because the rising Kier share price appears to have been triggered by the closing of prominent short positions.
What lies ahead?
While these results show some promise, the company still has a long road ahead. Debt levels continued to grow significantly in 2020. And now, these obligations represent nearly 82% of the firm’s capital structure. Given the limited level of underlying profitability, I wouldn’t be surprised if the management team decides to raise additional capital through investors to keep up with interest payments.
But I think it is worth mentioning that the CEO, CFO and Chairman of the board were buying up shares last year. Generally, this is an indicator that the management team believes that the Kier share price is too low and implies that the company can make a comeback.
The bottom line
Looking at the most recently published results, it looks like the turnaround plan is starting to bear fruit. As of December 2020, the total order book continued to rise to £8bn, and free cash flow stayed in the green.
However, as encouraging as these figures may be, the high level of debt is concerning, in my opinion. And it will likely require a multi-year process to bring it back under control, as will the recovery of the Kier share price. Personally, I won’t be adding this stock to my portfolio, because I think there are far better investment opportunities out there.
