Construction and services company Kier Group (LSE:KIE) has endured a dismal period since its drastic fall from grace in May 2019.
But the problems started earlier than last year and the share price has fallen nearly 90% in the past three years. So a £1k investment three years ago would now be worth around £100. Ouch! The story is a depressing one for existing shareholders who have endured its share price crash. The question is, can the Kier share price recover?
Its share price has almost doubled in a month, particularly after Prime Minister Boris Johnson gave the green light to the controversial HS2 high-speed rail link, for which Kier is a contractor.
In recent months Kier has confirmed new work is in the pipeline. Including its first contract with Openreach on its Network Services Agreement (ONSA). This multi-million-pound contract on the UK broadband and telephone network is for five years.
Kier is also progressing with its streamlining plan by outsourcing IT, reducing staff and closing offices.
Debt destruction
But it is too early to get carried away with enthusiasm, I feel. Last year’s annual report, released in September for the period to 30 June, stated it had tumbled to a pre-tax loss of £245m, from a £106m profit the previous year. But Kier’s biggest challenge is its debt pile. It reduced its net debt from £186m to £167m at the end of June 2019, but its average month-end net debt was £422m, which was an increase from £375m in the previous year.
The company intends to sell Kier Living, its homebuilding division, which is estimated to be worth around £120m. Selling this should help reduce the inflated debt pile and release working capital.
The financial collapses of Carillion and Interserve cast a cloud of fear over the wider outsourcing sector. As such, Kier has become one of the most shorted stocks on the London Stock Exchange. Not a title any company wants to hold.
Shorting stocks is not for the faint-hearted. It means you are betting against a company, expecting it to fail. If the company share price falls, the individual who is shorting the stock makes a profit.
However, if the company gets its act together and produces better than expected results, its share price will rise. Then the short seller is left not just making a loss, but potentially an astronomical loss because, when it comes to short selling, losses can accumulate infinitely faster than gains.
The short-selling of Kier shares has declined in recent months, but it remains a highly shorted stock by prominent hedge funds.
That is perhaps no surprise because, as Brexit uncertainty rages on, it poses a disruptive threat to the company’s supply chain. It has put its dividend on hold for a couple of years, so that is not even available to entice investors.
Unfortunately, I don’t think Kier is a good Buy. The debt and Brexit carry too much uncertainty in a sector already tarnished with past failures. I think there are better opportunities elsewhere to become smarter, happier, and richer through stock market investing.