Tempted by the Kier share price? Here’s what you should know

Is Kier Group plc (LON: KIE) about to go bust?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »