Kier’s share price has almost doubled in little more than a month. It closed yesterday at near 150p. Jupiter’s recovery hasn’t been as spectacular, but a rise of as much as 10% during yesterday’s trading, and a close at 411p, showed the market further warming to the company’s prospects.
Despite the recent gains, both stocks remain way below their previous highs. Could now be the perfect time to snap up shares in these two businesses?
A good deal
The positive trading in Jupiter’s shares yesterday followed news of its proposed acquisition of Merian Global Investors. The acquisition of Merian’s £22.4bn of assets under management (AUM) will take Jupiter’s total AUM to £65.2bn. The upfront consideration of £370m will be paid through the issue of new Jupiter shares.
In an article earlier this month, I argued Jupiter was overvalued compared with asset management giant Schroders. My valuation acid test in this sector is to avoid stocks valued at above 3% of AUM. At the time, Jupiter was trading at 4%, compared to Schroders at 1.9%.
In acquiring Merian’s £22.4bn of AUM for £370m, Jupiter’s paying 1.7%. As such, this looks a good deal for Jupiter. But how does the valuation of the enlarged group stack up?
Acid test and dividend
According to my sums, we’re looking at a market valuation of £2.3bn against AUM of £65.2bn. The valuation represents 3.5% of AUM, meaning Jupiter remains in overvalued territory on my acid test. As such, I’d avoid the stock at the current price.
It’s also worth noting when I looked at it earlier this month, Jupiter was yielding 6.3% on a City forecast dividend of 24.4p a share (consisting of a 17.1p ordinary and 7.3p special). In yesterday’s acquisition announcement, the company said it won’t be paying a special dividend this year. With just the 17.1p ordinary, the prospective yield drops to 4.2%.
Positive news flow
Construction and infrastructure services firm Kier endured “a difficult year, resulting in a disappointing financial performance” in its last financial year ended 30 June. However, since it released those results in September, there’s been positive news flow.
In a trading update in January, the company said it continues to win new work. It also said it continues to make “good progress” on reshaping its business, with office closures, the outsourcing of certain functions, and a big reduction in headcount. Subsequently, the shares soared, following Boris Johnson’s decision to press ahead with the controversial HS2 rail project.
Despite the rise, the stock still carries a bargain-basement earnings rating. It’s trading at less than 3.5 times analysts’ 44p-a-share earnings forecast for the current year to 30 June.
However, debt and the state of the company’s balance sheet remain a big concern for me, as they do for a number of my Motley Fool colleagues. The firm has spoken of continuing to manage its net debt in trading updates since September. However, it’s given no hard numbers.
We’ll know more when we get Kier’s interim results on 5 March (brought forward two weeks from their original scheduled date). For the time being, I’m continuing to avoid the stock.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). 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.