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Is the Kier Group share price worth a buy?

The short-sellers can taste blood. They are circling Kier Group (LSE: KIE), making it one of the most shorted stocks in the London market. Parallels are being drawn with its former competitor, Carillion.

Over the past year, Kier’s share price is down by over 85%. In September, the company reported a £245m loss. In the previous year, however, it was making a healthy profit of £106m. What went wrong?

Unsurprisingly, Kier is sitting on a lot of debt. In its latest report, this figure has reduced by 10% over the past year to £167m of net debt, with a rights issue being taken last year to strengthen the balance sheet. However, the amount still concerns me and I don’t think the measures the business has taken go far enough to reduce the figure.

The reported debt worries me. But what’s worse is that my fellow Fool, Rupert Hargreaves, has called “off-balance-sheet debt”. This could include debt inside joint ventures, and my colleague has pointed out that some estimates for the company’s total debt – including off-balance-sheet – could amount to over £1bn.

What other steps has the company taken in its attempt to reduce net debt?

Cutting costs

The company hopes to cut costs of around £55m from 2021. The business is selling part of its company, Kier Living, and has reported that this is progressing well. The group is similarly focusing on its core activities, with the company likely to exit from its property & environmental services and facilities management businesses. Further to this, it has announced job cuts of 1,200 and has held back its dividend for the next two years. A new management team has also been appointed.

If Kier’s creditors deem these turnaround measures to be enough, they could give the company breathing room to pay down some of its debt. Regardless of how the management act, I think with current market conditions, external factors could hamper its recovery.

In the construction industry, margins are being squeezed in the private and public sectors. There will also be question marks over how the company would cope with a no-deal Brexit. Will investments in infrastructure and property construction dry up? At the start of September, Britain’s building industry was hit by the sharpest fall in new work in more than a decade. Costs are escalating too, tightening the already thin margins further.

What are the positives?

The low valuation may get value investors initially excited, but with such a fragile balance sheet, I believe that buying shares in this company is too much of a risk. On this occasion, I think the market has priced the shares correctly. However, they could keep on plummeting. The removal of the dividend is also a kick in the teeth for loyal investors, but it is a necessary measure for the business with debt levels as they are.

For now, I’ll be avoiding this stock.

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T Sligo 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.