Here’s why Kier share price weakness makes me want to buy

The Kier (LON: KIE) share price climbed last year, but it’s falling back. Here’s why I’d buy on encouraging first-half results.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s painful to see infrastructure and construction contractor Kier Group (LSE: KIE) still down 90% over the past five years. Even the 2021 recovery has gone off the boil, and the Kier share price has been sliding again in 2022. But I believe I’m seeing signs of renewed strength, and I think Kier shares could be undervalued now.

Kier has been through a few troubled years, with the civil infrastructure sector under severe competitive cost pressures. Then the Covid-19 pandemic didn’t help. From 2018 to 2020, earnings per share slumped by 90%, leading to the share price collapse. But then profits started growing again.

For the year to June 2021, Kier saw EPS more than double from the previous year. Granted, the 25p per share was still way below 2018’s figure of 125p. But any return to growth has to start somewhere. So does that start look like it’s continuing in the current year?

H1 results

Well, we had first-half results Wednesday. The Kier share price dropped a few percent in response, but I suspect that’s because there were no surprises. I see it very much as steady progress, and I like that.

There’s no dramatic growth. In fact, revenue actually dipped a little, to £1.54bn from £1.62bn at the same stage the previous year. But operating margins are improving, up to 3.5% from 2.9%. And that boosted pre-tax profit very nicely, to £43m from £27.8m.

Bottom-line adjusted earnings per share came in at 7.8p. That’s down from 10.4p at December 2020, due to the dilution that came from Kier’s recapitalising. What does that mean on the valuation front? If we double the interim EPS figure as a rough guess at what the full year might look like, we’d get 15.6p.

Kier share price valuation

On the current share price, that suggests a price-to-earnings of only 5.4. That can be misleading for a company carrying debt, however. And because of that, I like to work out an enterprise value P/E. That covers what you’d have to stump up to buy the entire company and pay off its debt.

On the debt front, Kier has been making solid progress. Net debt at 31 December 2021 stood at £131m, down from £354m at December 2020. Due to the nature of the business, debt can vary month to month. But during the period, month-end debt averaged £191m (from £436m).

On the December debt level and today’s Kier share price, I calculate an enterprise value P/E of 7.1. And using the average month-end debt instead, it still only reaches 7.9. That looks like undervaluation to me, but what’s the downside?

Risky sector outlook

For one thing, companies heavily engaged in infrastructure engineering tend to carry relatively modest valuations. The highly competitive nature of the business, with its tight operating margins, means it often doesn’t take too much to plunge a project into loss. It’s a risky business to be in.

On top of that, the outlook for UK infrastructure projects is far from rosy. With the effects of the pandemic, escalating fuel costs, and economic fallout from the Russian war in Ukraine, civil engineering budgets might be a bit squeezed for some time.

So yes, there are clearly risks in investing at the moment. But I still think the Kier share price is too low. Kier is on my list of buy candidates.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Is now the right time for me to buy revived FTSE national institution Marks and Spencer?

Marks and Spencer was once a revered FTSE 100 firm, but poor decisions led to its demotion in 2019. Now…

Read more »

Market Movers

Up 11% today, can this FTSE 250 stock finally get motoring?

Jon Smith explains why the Aston Martin share price has jumped this morning, but urges caution after he picks apart…

Read more »

Investing Articles

With £456m of net cash, FTSE 100 stock easyJet’s ready for take-off

Our writer's been positive on this FTSE 100 for some time, but these Q3 results and its growing cash pile…

Read more »

A senior woman sits up on the exam table at a doctors appointment. She is dressed casually in a blue sweater and has a smile on her face as she glances at the doctor. Her female doctor is wearing a white lab coat and seated in front of her as she takes notes on a tablet.
Investing Articles

Primary Health Properties: a FTSE 250 REIT with a 6% yield, a growing dividend, and a positive outlook

After its latest results show rental income growth, Stephen Wright's looking to buy a FTSE 250 REIT set to benefit…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

How much passive income could I make for every £1,000 invested in Aviva shares?

Even a relatively small investment in Aviva shares could generate much greater passive income, particularly if the dividends are reinvested…

Read more »

Close-up of British bank notes
Investing Articles

I’m considering 100 shares in this FTSE 250 gem to aim for £300 a month in dividends

Mark Hartley outlines why a lesser-known banking stock from the FTSE 250's worth considering for an income portfolio in 2024.

Read more »

Investing Articles

History suggests these UK shares might soar if interest rates are cut in August

Some UK shares could rocket if interest rates fall from its 5.25% high next month. And there's one our writer…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

Here’s why H1 results could boost the AstraZeneca share price

The AstraZeneca share price has been a success story in the past five years. With H1 results due, can it…

Read more »