FTSE 250 construction company Kier Group (LSE:KIE) announced it is cutting 1,200 jobs on Monday, confirming speculation that had mounted about a new strategy from the firm to combat increasing debt.
The news sent the share price tumbling more than 10% at the start of the week, following a 36% loss in market value on Friday past, with the price at 108p per share at the market close on Monday.
That represents a loss of close to 70% of its market capitalisation in the last six months as the company takes drastic action in order to reduce debt through a series of cost-cutting measures.
The job cuts come as part of a simplification of the firm’s property services portfolio, which will shed non-core businesses such as Kier Living, as well as its property, facilities management and environmental sections.
Too late?
Kier’s emergency measures will aim to reassure investors that it is taking drastic action to reverse the share price trend, but for many it is already too late.
Dividend payments are to be suspended by Kier for 2019 and 2020 as it also announced net debt was to be higher than expected by the end of June. This followed on from a profit warning at the beginning of the month, so there really is not a lot to be positive about when it comes to Kier’s share price.
New chief executive Andrew Davies has not wasted any time in wielding the axe on underperforming operations. Its core business of regional building work and major infrastructure contracts is less susceptible to swings in demand, but whether it is enough to firm up its struggling balance sheet, I wouldn’t be so sure.
As Roland Head has discussed, this week’s issues are not isolated incidents any more. The last year saw setback after setback for Kier, so without any major recovery and with a lack of dividends to fall back on, even if I was an opportunistic investor, I wouldn’t buy Kier shares right now.
Profits vs debt
One thing that Kier does have going for it is the fact that, despite its problems, the business remains profitable and its diversified portfolio is on track to make £130m net profit in 2019. Yet the key issue here is the spiralling debt, which the December rights issue failed to put right.
While I don’t think Kier will end up down the same road as fallen construction services giant Carillion, the board should certainly take note of the mistakes were made in the lead-up to that company going into administration
Difficult measures and decisions will have to be taken, and the first stage of that process could be the cost-cutting strategy announced by Davies this week.
However, I would suggest it could be months before that process may begin to reap rewards so I wouldn’t buy until the strategy is further developed over the longer term.