When I look at a recovery prospect, I steer clear until I see evidence that a firm’s solvency is assured and its return to health has actually started happening. I’m now also adding a requirement that I can see the potential for at least a doubling of the share price.
This approach has been strengthened by a string of failures, the most recent being the collapse of Thomas Cook, whose survival had looked almost assured just a week before it went bust.
Big faller
I’m keeping a close eye on Kier Group (LSE: KIE), which might be making slow progress in its struggle to return to health. Its 10% net debt reduction for the year ended 30 June might look encouraging, down from £186m at 30 June 2018 to £167m a year later, but it’s nowhere near the progress the company had hoped to make by this stage.
There’s no hiding the fact that the results were painful overall, as chief executive Andrew Davies said, “Kier experienced a difficult year, resulting in a disappointing financial performance.” But he did stress that, with a new management team in place, “The re-shaping of the Group is designed to reduce its overall indebtedness during FY 2020 and to restore Kier to robust financial health.“
The plan for achieving long-term balance sheet health involves the sale of the Kier Living division and withdrawal from the Environmental Services and Facilities Management businesses, a reduction in capital investment in Property to £100m by the same point next year (from £184m at 30 June this year), and job losses of 1,200 in the next financial year (following on from 650 in FY 2019).
Share price
After the collapse of Carillion, short sellers started to attack the rest of the sector, including Kier. This was far from the only cause, but it added to the downward pressure on Kier’s share price, and we’re now looking at a fall of around 90% over the past 12 months. As well as thinking that the whole sector was overstretched, some were even of the opinion that Kier’s cash flow accounting had been a little on the optimistic side.
On current forecasts, Kier shares are on a forward price-to-earnings (P/E) of under 3. That’s pretty much unheard of, certainly for a company that’s it’s not headed for the wall, and it clearly represents a market consensus that Kier shares are not to be touched with a bargepole.
Even if we doubled the effective P/E to account for the firm’s debt being very close to its market cap, and to try to get some valuation for the company alone, we’d still be looking at an effective multiple of less than 6.
Too many questions
Right now, there are many questions concerning Kier’s ability to turn its balance sheet and cash flow positions around, and some of the key ones are presented by my Motley Fool colleague G A Chester – I’d urge you to check them out before you think of investing.
It’s possible that Kier could become the turnaround story of the century, that there’s way more than a share price doubling on the cards, and that my recovery rules guarantee I’ll miss out. But avoiding the real possibility of a total wipeout is more important to me, and I’m definitely not buying.