Shares in construction firm Kier Group (LSE: KIE) have risen by 150% since ‘vaccine day’ at the start of November. But the Kier share price gained new momentum this week, climbing nearly 30% after the company announced a £241m fundraising plan.
I have to admit that the terms of the new funding are more favourable for shareholders than I expected. The outlook for the construction sector also seems positive. Should I be buying Kier shares for my portfolio ahead of a potential growth streak?
Looking good for Kier?
Kier has been struggling with its debt burden for the last couple of years. But I think the company may have turned a corner. The order book edged higher to £8bn at the end of December, despite the impact of Covid-19 and more disciplined contract bidding.
Profits were stable last year and the company’s cash generation improved.
Cutting debt is an essential next step, as it will give potential customers and subcontractors “greater confidence in Kier as a counterparty”. This is important for construction groups like Kier, which often need to lay out money in advance to mobilise major projects.
I’m impressed by the progress made recently by CEO Andrew Davies. In April, Mr Davies agreed a £110m deal to sell the group’s housebuilding business, Kier Living. When added to the money from this week’s fundraising, I estimate that Kier’s average month-end net debt could fall from £436m in December to perhaps £130m by the end of June.
Kier share price: cheap as chips?
The latest consensus forecasts suggest that Kier could generate earnings of around 30p per share this year, or a net profit of about £51m. As I write, the stock is trading at around 120p. This appears to value Kier on just four times forecast earnings.
This would be cheap, but it’s not accurate. Raising money by selling new shares will cut its debt, but it will result in a big increase in the number of shares in circulation. This will reduce earnings per share.
Kier’s figures show that this week’s fundraising will create 284m new shares. When these are added to the existing share count of 162m, it will have around 446m shares.
Once this fundraising is complete, I estimate that at 120p, Kier stock will trade on a more normal valuation of 10.5 times forecast earnings.
I’m not convinced this is really cheap. The construction sector is generally a low-margin business and there’s always the risk that future projects will run into problems. Kier will also still need to prove it can deliver sustainable growth while generating enough cash to keep debt levels down. I don’t think there’s much chance of a dividend for the next few years either.
On balance, I think Kier looks fully valued at a share price of 120p. I’m not planning to buy the stock for my portfolio at this level, although I might be interested at a lower price.
