Over the past 12 months, the Kier Group (LSE: KIE) share price has plunged nearly 92%, including dividends to investors. And following this decline, the stock is trading at what appears to be an attractive valuation.
According to the City’s current figures, the stock is trading at a forward P/E of just one.
I will admit, even I’m attracted to this bargain-basement price, but is the stock worth buying at current levels, or is it a value trap?
Looking at Kier’s valuation, it seems to me as if the market is fully expecting this business to go bankrupt soon. With any business, there’s always a chance that it will run out of money, but it seems as if Kier is funded for at least the next year.
Even though Kier struggled to raise emergency funding via a £264m rights issue in December, chief executive Andrew Davies believes the company’s average monthly net debt will hit a maximum of £630m this year, well within debt facilities of £920m. As the group is also looking to offload some of its non-core business divisions, asset sales will also bolster its financial position.
However, as I have explained before, Kier has a lot of off-balance-sheet debt, which management tends to overlook when publishing net debt figures. Because the company doesn’t publish these figures, it is difficult to tell if this debt is going to be a problem or not. As most of the borrowing is in joint ventures, you could argue that’s it’s not relevant to the business, and in this case, Kier appears to be financially stable.
That being said, do I think there is a chance to Kier might still have to ask shareholders for more money at some point in the near future? There’s no getting away from the fact that the company needs to strengthen its balance sheet.
If you believe Kier has the financial resources to persevere with its restructuring efforts and stave off bankruptcy, the biggest threat facing the business is eliminated.
This brings me back to the company’s growth and valuation. At the time of writing, City analysts are expecting the firm to report earnings of 67p per share for 2019. If Kier can hit this target (and it is a big if) then the stock is trading at a forward P/E of 1.1.
Even though the chances of the company hitting this target are slim, if it does, shareholders could be well rewarded. With the rest of the construction & engineering sector trading at a forward P/E of around seven, shares in Kier could be worth as much as 469p if it returns to growth.
The reward is better than the risk
With a potential upside of 500%, if you’re comfortable with the level of risk here, it might be worth taking a small position. Although, I should caution that this stock is only suitable for the most risk-tolerant investors.
Even though Kier looks well funded, there’s still a high chance that it could collapse, which will wipe out shareholders. However, this risk of a total capital loss is more than offset by the potential five-fold return in the best case.
Rupert Hargreaves owns no share 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.