Kier Group (LSE: KIE), the construction business that, among other things, is a contractor for the HS2 railway line, saw its shares plummet a massive 40% on Monday after it warned that full-year profits would be around £40m lower than analyst estimates. What’s more, the company said it would see higher levels of net debt than expected despite having raised £265m just a few months ago, prompting concerns that it will need to raise yet more capital – another potential millstone for the stock.
With this kind of large sell-off and its share price being at a historically low level, it seems only natural to ask if now is the right time to buy in expectation of a turnaround? But there’s another question too: will there ever be a right time to buy Kier again?
Well, at this point the firm seems to have more going against it than for it. The large level of debt and its badly received £265m emergency rights issue late last year seem to mirror, in some ways, the failed outsourcer Carillion. Interestingly, new Kier CEO Andrew Davis was previously appointed to lead Carillion, a post he was unable to take up as it went into liquidation. That company saw high levels of rising debt and falling levels of working capital effectively leading it to run out of money.
Kier Group also took a hit in terms of investor confidence earlier this year, after it revised up its levels of debt at that time due to an “accounting error”. That is always a worry for investors who understandably want to know that the numbers they are using to make their share-buying decisions are accurate. Given the error, and with other growing concerns, many investors are very cautious regarding the company.
Another bad sign from Monday’s warning was the exact nature of the problems. While some have suggested the company was trying the classic ‘kitchen sink’ strategy (you know, offering up all the bad news at once to limit the downside from that bad news to a one-off shock), a closer look at the numbers was enough to see that the bad news really was… well, bad. Rather than Kier’s profit issues being about technical costs and accountancy changes, for example, the majority of its falling profits come from a fundamental reduction in revenues from its key highway construction, home maintenance and construction businesses.
The company does however, have a few (mildly) positive things going for it. Firstly, even with Monday’s warning, it is still expected to be in profit to the tune of £130m this year. What’s more, unlike Carillion, it does not rely on a few large contracts, but rather has a fairly diverse portfolio of somewhere in the region of 500 contracts, the majority of which are under £10m. Given that we are yet to see the new CEO’s recovery strategy, the company may still have a future. But personally, I would wait to see how things turn out before putting any money in.
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Karl has no positions 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.