Is construction and services company Kier Group (LSE: KIE) about to go bust and follow Carillion into history? Probably not, in my view.
But that doesn’t necessarily mean that the firm’s shares are a good buy.
The Kier share price has fallen by more than 85% over the last year. There are good reasons for this. In this article I’ll explain the risks and opportunities for shareholders and give my verdict on this battered stock.
What’s gone wrong?
Empire-building by acquiring rival firms is a risky strategy. But it’s the choice Kier made by acquiring rivals including May Gurney (2013), Mouchel (2015) and McNicholas (2017). These deals added to the group’s debt pile. In my view, they left the firm less able to deal with any future problems.
Sure enough, in November 2018, Kier shares crashed after it launched a £264m rights issue to raise funds to accelerate debt reduction. At the time, the firm said that trading was in line with expectations and explained the fundraising as a response to “tighter credit markets”.
However, in June 2019, the company issued a profit warning, blaming weaker than expected revenue growth. Net debt was still worryingly high, with an average month-end figure of more than £400m.
Sell the family silver
After struggling to complete the November fundraising, I suspect that Kier’s management was advised against asking shareholders for any further cash.
However, cash is certainly needed, in my view. Last week’s results showed that the group’s average month-end net debt rose from £375m to £422m in 2018/19. At the same time, underlying pre-tax profit fell by 40% to £98m.
In an effort to cut debt and stabilise the ship, boss Andrew Davies now plans to sell the firm’s housebuilding and facilities management operations. He will also reduce the amount of capital committed to its Property business, which should gradually free up additional cash.
In fairness, I think this is probably the best plan possible in the circumstances. Unfortunately it will mean that the company loses its most profitable activities. Housebuilding and property investment generated an operating margin of 6% last year. The group’s property operations generated a return on capital employed of 18%, which I’d see as an attractive figure.
In contrast, Kier’s Buildings and Infrastructure divisions generated operating profit margins of 3.3% and 3.4% respectively. This kind of low-margin work often requires upfront expenditure on materials and equipment and can be vulnerable to cost overruns and delays.
The right time to buy?
Mr Davies may well restructure Kier to be a best-in-class operator in this sector.
And it’s true that the firm’s shares look very cheap at the moment, trading on just three times last year’s underlying profits.
However, such an extreme price tag carries a clear warning from the market that further problems are expected. I share this view. It’s also worth remembering that the dividend has been suspended for at least another year.
Kier shares look highly speculative to me at current levels. You could get lucky and double your money. But you could also face big losses. In my view, this isn’t an attractive business or sector to invest in. I’d look elsewhere for hidden bargains.
