I believe the market’s sentiment towards Kier is heavily influenced by the company’s parallels to the recently defunct Carillion. Similarities between the two firms are patent, most notably a high debt, profit warnings and a dependency on volatile projects. For Carillion, mismanagement of costs on its large projects led to the writing down of nearly £1bn worth of contract value and, when combined with high debt, its demise. The problem for Kier boils down to this: does the debt structure and contract risk combine to make a repeat of Carillion inevitable? I will explore the two primary factors separately.

First, I will address the issue of the company’s debt. In November of last year, Kier showed its desperation for funds with an emergency rights issue. An equally worrying lack of enthusiasm from the market followed. In this most recent attempt to avert crisis, Kier brought its debt-EBITDA ratio down to 1x. This would be satisfactory under conditions of readily available credit and reliable profits. Sadly, these conditions may not apply to Kier. Income stability is inextricably linked with contract volatility.

On top of this, the contracts it is getting might dry up: the government has expressed a wish to minimise exposure to companies with high debt. This could well mean project loss if the debt burden creeps up again. In the near term, the company’s credit facility provides a much needed backup plan. However, this is due to be revised in 2022 and access to funds will likely be reduced. The bottom line: debt is safe for now but, if the balance sheet remains unstable, there may be no second chance.

Now let us consider contract stability, the most important and least transparent factor. In the context of this article, Kier’s key strength comes from its project diversity, approximately half its revenue is derived from small contracts. With 400 projects at an average size of 7.5m, Kier has some stability simply from quantity and diversity. Services, the umbrella that contains Kier’s larger and more risky projects, is again fairly diversified. Smaller contracts make up half of the sector’s revenue. Some “Carillion” type risk still surrounds the larger projects that do exist but it appears manageable.

Perhaps Kier isn’t so similar to Carillion after all. The situation is fragile but the company isn’t burdened with the same risk that Carillion had. If management can minimise unexpected costs, its new smaller debt pile could be sustainable. I think the current situation provides risk-tolerant investors a chance to capitalise on the irrational fear the market exhibits towards Kier.

The post Is Kier’s share price a risk worth taking? appeared first on The Motley Fool UK.

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Neither Sam nor The Motley Fool UK have a 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.

Dart Group, the holding company that mainly constitutes of Jet2, is considerably smaller than its competitors. It has grown rapidly, tripling revenues over five years. However, it still carries 9 times fewer passengers than its closest rival easyJet. These airlines differentiate on customer experience and price. Jet2, with a host of awards, sits at one end and, with an average fare of €39, Ryanair sits at the other. When it boils down to it, Ryanair and easyJet are substitutable investments, both mature businesses with customer growth in the range of 7%-10%. Jet2 brings higher growth (45% last year) and, with it, greater risk. 

Financial metrics

In the context of a highly competitive market, profitability is king. The top end is getting cut throughout the market: easyJet estimates there will likely be a 10%+ drop in fares through 2019, closer to 5% for Ryanair. Jet2 has the furthest to fall, knocking 15% off its prices in 2018 alone. So how much lower can fares go before profits disappear?  Reflective of a rough year, easyJet’s profit margin for 2018 was 3.2% (8.6%), Jet2’s came in at 7% (4.2%) and Ryanair 14% (18%). In brackets are the companies’ five-year averages. These tell a slightly different story – throwing doubt over Jet2’s margin and suggesting easyJet’s is set to improve. The bottom line remains the same, however – Ryanair stands to gain from a competitive environment where price rules.

Debt has the final word. A long enduring price war, rising fuel prices and increasing costs from disruption (e.g. drones) should make investors think twice about high leverage. Dart Group has the largest problem, characterised by a debt/EBITDA ratio of 3.2x and an interest coverage close to 7. Ryanair’s ratio is 1.8x and easyJet has net cash. High leverage should be expected from Dart Group, with rapid growth and a lot to prove. In a different industry, with low supply, it would be a different story. As it is, the company’s larger competitors sit in a stronger position to capitalise on a price war.

The best investment?

Many investors point towards easyJet’s consistent dividend, with a forward yield of 6.4%, as a winning metric. However, with a payout ratio over 100% and faltering revenues, this may be a thing of the past. In comparison, Ryanair regularly buys back shares – last year’s yield was 5.8%. Again, as a growth stock, Jet2’s low yield of 1% is expected.

Personally, too many parallels exist between Jet2 and the plethora of airlines that have recently gone bust. The real winners from this market squeeze will more likely be the big players. Ryanair holds a distinct place in the market, with its high margins, low costs and low fares. Comparable on other metrics, I back Ryanair, not easyJet, for market domination.

The post Are these UK airline stocks set for market domination? appeared first on The Motley Fool UK.

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Neither Sam nor The Motley Fool UK have a 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.

Back story

The stock hit trouble when it acquired the American company Peacock Foods, in late 2016. Since then it has been in decline. Pronounced problems came to light at the end of 2017: in three months the stock’s value more than halved. The company suffered a plethora of issues, including a dysfunctional IT system, inefficient acquisitions and the loss of a major client. Proof of its failings came in the form of a profit warning not long after, taking the stock to its lowest level since 2013. Despite a recent rally, spurred by a new strategy, the share price still lags 15% behind its index (the FTSE 250) at the time of writing.

Comparable in magnitude to its failings is the firm’s subsequent turnaround. Late 2018 saw Greencore sell its troubled American arm for US$1bn to Hearthside Food Solutions, a 45% return on investment in two years. This remarkable sale brought an end to the company’s woes and signalled the beginning of a new business model. A clear dedication to shareholders is visible in management’s actions: half of the proceeds from the American sale are to be distributed as a tender offer. On top of this, £293m has been committed to shoring up the balance sheet, pushing Debt/EBITDA below 2.

A return to basics

With a return to its core business, Greencore promises to outperform in the future. As of 2019, the UK and Ireland are its sole customer markets. Business is primarily conducted with long-term clients (for instance, in the sandwich division 90% of contracts run for over three years).

This stability means extrapolation of past performance provides a reasonable estimate of the future. Whilst geological expansion clearly failed, at home Greencore has grown successfully. Pro Forma revenue figures provide a good illustration: the adjusted metric considers only UK and Irish operations, excluding divisions that the company divested from in 2018 and ignores extraordinary costs. Under these criteria, revenue grew by 8.7%. In comparison, its close competitors Premier Foods, Kerry Group and Bakkavor grew revenue by 3.7%, 3.1% and 2.7% respectively. Outperformance at the top end indicates a superior ability to grow. Within the £40bn UK convenience food market, Greencore is free to take full advantage of this outsized growth.

The company’s dividends mirror financial stability. Yields have averaged 2.7% over the past five years, a task management has shown considerable commitment to and, more importantly, has the financial backing to maintain.

In the context of a favourable US exit and continued outperformance at home, a 15% discount to the FTSE 250 looks like an oversight to me, rather than a reasonable valuation. Add in stable dividends and a market-leading domestic division, and you have a worthy investment in my opinion!

The post Can this dividend stock continue its impressive turnaround? appeared first on The Motley Fool UK.

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Sam Weston does not own shares in any company mentioned in this article. The Motley Fool UK owns shares of and has recommended Greencore. 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.