Kier Group (LSE: KIE) shares have fallen by nearly 90% over the last year. Anyone caught holding this stock may be wondering how much worse things will get. Memories of the failure of rival Carillion at the start of 2018 probably won’t help.
However, while I’m concerned about this situation, I think the shares are unlikely to go to zero. Indeed, although the situation remains uncertain, I’d argue a recovery is possible.
Two good reasons
In my last piece on 6 June, I took a grim view of Kier’s rising debt. I’m happy to say a more recent update on 17 June has caused me to take a slightly more positive stance.
The first reason for this is Kier plans to sell or scale back various non-core parts of its business. The group’s housebuilding division, Kier Living, is up for sale. And its property development business, Kier Property, will be scaled back or sold as well.
Based on the numbers provided by the company, I estimate these changes should bring in £120m-£200m of cash. More importantly, the amount of working capital — or cash in hand — Kier needs to fund its operations should fall. This is expected to result in a lower average net debt level through the year.
The second piece of good news is that Kier is not currently in financial distress. Although debt levels have risen above expectations, the company’s average month-end net debt of £420m-£450m is still well below the £920m available under its current debt facilities.
These lending arrangements will need to be renewed at various times between 2021 and 2024. But it’s clear Kier has the kind of breathing room that Carillion simply didn’t have.
Would I buy Kier?
I think chief executive Andrew Davies is taking the right decisions. However, the scale of change he’s planning means the outlook for profits is unclear to me.
I suspect Kier shares may offer some value at current levels. But this situation remains too risky for me. I’ll be staying on the sidelines for now.
This retailer looks cheap
Online-based fashion retailer N Brown Group (LSE: BWNG) has seen its share price fall by 60% over the last five years.
The group’s main businesses are Jacamo, Simply Be and Ambrose Wilson. Management has been gradually repositioning these value brands as online operations, while scaling back its catalogue and store operations.
Last year saw gross profits from product sales (clothing) fall by 5.8% to £320.8m. This shortfall was partly compensated for by an increase in interest income from customers buying on credit, which rose 7.1% to £176.9m.
The credit business is obviously a powerful source of profit (as it is for Next). The question is whether the company can return product sales to growth. A trading update last week suggested there may be some signs of hope. Although total product sales fell by 5.4% during the first quarter, online sales rose by 3% over the same period.
From what I can see, falling product sales reflect the firm’s decision to scale back various legacy parts of its business. What’s left should be a profitable online operation.
The situation isn’t without risk, but the stock now looks cheap on just 6.1 times 2019/20 forecast earnings, with a 5.5% dividend yield. In my view, N Brown could be worth a closer look.
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Roland Head 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.