The 40% share price crash at civil engineering contractor Kier Group (LSE: KIE) on 3 June sent shock waves across the UK investment world. But it was just one chapter in a 12-month saga that’s seen Kier shares lose nearly 90% of their value.
Those who saw the sell-off as overdone and bought into the initial recovery have been disappointed, as it soon collapsed and the shares headed further down. Since triggering a profit warning on 3 June, Kier Group shares have fallen more than 60%.
The questions now are what have we learned, what’s likely to happen next, and should we buy the depressed shares?
To the first one, the answer for me is to be very wary of companies that recently looked healthy but which have hit a slump. And that’s doubled up for ones that have seen the need to replace their top-line management.
That’s actually usually a good thing. But what often happens is that the burgeoning problems the previous management failed to properly understand and address are uncovered by new bosses. We so often see a string of potentially devastating profit warnings following a regime change.
That was emphasised by a further update on 17 June, on the conclusion of a strategic review instigated by new chief executive Andrew Davies, with much of the focus on the firm’s balance sheet and costs.
Little and late?
There’s going to be a disposal of non-core assets and a reduction in employee numbers of around 1,200 to try to achieve annual cost savings of around £55m from 2021, and a new focus on cash generation and debt reduction.
Kier also said it intends to “embed a culture of performance excellence.” I do wish companies would avoid such pretentious corporate-speak in the their communications — we investors aren’t stupid and we just want to see the beef.
Oh, and the other big thing is that Kier suspended its dividend for 2019 and 2020, so the yield that got as high as 7% last year has become a thing of the past. But while I applaud the action in the cause of balance sheet renewal, it highlights another company failing and that continues to annoy me.
When a company is facing cash flow pressures and mounting debt, stopping the dividend shouldn’t be a last-minute, fan-cleaning effort. No, it should be a pre-emptive strike aimed at reducing financial pressures as soon as possible.
But there does seem to be a culture in UK business of putting the bravest face on things and not opening up and accepting the true nature of a company’s difficulties until it’s nearly too late.
All investors can do, I think, is be vigilant and always keep an eye on a company’s debt and its costs of servicing that debt, especially when the company is working in a very competitive and economically-squeezed industry.
Will Kier Group go bust? Fellow Fool writer Karl Loomes paints a depressing picture of the company’s chances, while pointing out things could get even worse before they get better (if, that is, there’s still a company there for things to get better for).
Kier is in firm bargepole territory for me, and I’m not going anywhere near it.
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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.