Kier has been through a few troubled years, with the civil infrastructure sector under severe competitive cost pressures. Then the Covid-19 pandemic didn’t help. From 2018 to 2020, earnings per share slumped by 90%, leading to the share price collapse. But then profits started growing again.

For the year to June 2021, Kier saw EPS more than double from the previous year. Granted, the 25p per share was still way below 2018’s figure of 125p. But any return to growth has to start somewhere. So does that start look like it’s continuing in the current year?

H1 results

Well, we had first-half results Wednesday. The Kier share price dropped a few percent in response, but I suspect that’s because there were no surprises. I see it very much as steady progress, and I like that.

There’s no dramatic growth. In fact, revenue actually dipped a little, to £1.54bn from £1.62bn at the same stage the previous year. But operating margins are improving, up to 3.5% from 2.9%. And that boosted pre-tax profit very nicely, to £43m from £27.8m.

Bottom-line adjusted earnings per share came in at 7.8p. That’s down from 10.4p at December 2020, due to the dilution that came from Kier’s recapitalising. What does that mean on the valuation front? If we double the interim EPS figure as a rough guess at what the full year might look like, we’d get 15.6p.

Kier share price valuation

On the current share price, that suggests a price-to-earnings of only 5.4. That can be misleading for a company carrying debt, however. And because of that, I like to work out an enterprise value P/E. That covers what you’d have to stump up to buy the entire company and pay off its debt.

On the debt front, Kier has been making solid progress. Net debt at 31 December 2021 stood at £131m, down from £354m at December 2020. Due to the nature of the business, debt can vary month to month. But during the period, month-end debt averaged £191m (from £436m).

On the December debt level and today’s Kier share price, I calculate an enterprise value P/E of 7.1. And using the average month-end debt instead, it still only reaches 7.9. That looks like undervaluation to me, but what’s the downside?

Risky sector outlook

For one thing, companies heavily engaged in infrastructure engineering tend to carry relatively modest valuations. The highly competitive nature of the business, with its tight operating margins, means it often doesn’t take too much to plunge a project into loss. It’s a risky business to be in.

On top of that, the outlook for UK infrastructure projects is far from rosy. With the effects of the pandemic, escalating fuel costs, and economic fallout from the Russian war in Ukraine, civil engineering budgets might be a bit squeezed for some time.

So yes, there are clearly risks in investing at the moment. But I still think the Kier share price is too low. Kier is on my list of buy candidates.

Could these outsourcers be in the foothills of a big recovery? And should I buy shares in them today?

When Kier and Babcock shares were overpriced

I turned bearish on the outsourcing sector in 2016/17. Having analysed a number of companies’ accounts, I concluded that with debt and worrying signs of aggressive accounting, their balance sheets were likely a lot more fragile than they appeared on the surface.

A few other analysts had reached the same conclusion. But more were to follow. Disclosable short positions in outsourcers began to rise steeply. Hedge funds were increasingly betting that Kier and Babcock shares (among others) were overpriced and set to collapse. At peak, almost 9% of Babcock’s shares and 14% of Kier’s were being shorted.

Aggressive accounting and weak balance sheets were ultimately exposed. However, much has changed at the two firms. These changes are why I’m considering whether to buy the stocks today.

Boardroom clear-outs and accounting clean-ups

Kier and Babcock have new management teams and I think these changes bode well for their share prices. The clear-outs of the old executives alone wouldn’t be sufficient for me to consider investing. But there have been other important changes.

Both companies have taken steps to improve what were previously opaque financial statements. Kier has implemented recommendations, on things like revenue recognition, made following an enquiry by the Financial Reporting Council’s Corporate Reporting Review Team. Management has also made other changes. These include the presentation of non-statutory profit “to improve the transparency and clarity of the group’s financial performance.”

At Babcock, new management has conducted a “contract profitability and balance sheet review.” This has identified impairments and charges totalling around £1.7bn. The company’s preliminary results for its financial year ended 31 March are currently delayed. This is in part because of “the large number of potential adjustments under consideration.”

Would I buy Kier at the current share price?

In addition to the management changes and accounting clean-up, Kier has substantially strengthened its balance sheet recently. It has raised £241m of new equity and sold its house-building business for £110m. The CEO has said this represents “the final milestone” in reshaping the group.

Kier trades at 4.6 times forecast earnings at a current share price of 129p. I think the stock looks very buyable on this valuation. However, I do have to accept the risk the shares may not perform well, if ‘new’ Kier’s strategy falters and it fails to meet its medium-term financial targets.

Would I buy Babcock at the current share price?

“We aim to return Babcock to strength without the need for an equity issue,” the company’s CEO has said. This will depend on the success of its self-help measures. These seem to include disposing of assets of at least £400m by next April.

Babcock is rated at 8.9 times forecast earnings at a current share price of 295p. This enough to put the stock on my watchlist. I await further details on the company’s financials and plans when those delayed preliminary results are published

Finally, its perhaps worth noting there are no longer any disclosable short positions in Kier and only one (0.59% of the shares) in Babcock.

That’s just what’s happened. At the end of April, the company announced it was planning to raise as much as £240m from investors to strengthen its balance sheet.

At the same time, the firm announced operating profits climbed to £28.8m for the last six months of 2020, from a loss of £24.4m the previous year. What’s more, the group’s construction order book stood at £8bn at the end of 2020. 

These figures are incredibly positive, and I think they support my opinion that the company could be at the beginning of a long growth spurt. 

Kier share price potential 

Since the company announced its fundraising, the stock has surged. Year-to-date, the Kier share price has added 82%. Over the past 12 months, the stock has increased in value by around 64%. 

Granted, this isn’t much in the grand scheme of things. Over the past five years, the stock is still down 88%. Nevertheless, past performance should never be used as a guide to future potential. Indeed, Kier’s fundamentals have improved substantially over the past 12 months. 

Kier looks set to benefit substantially from the government’s massive infrastructure spending plans over the next few years. As well as the £8bn of contracts at the end of 2020, it’s also won contracts this year. These include a £200m, eight-year deal with TfL.

Management also reckons the company is “well-placed to benefit” from £5bn of spending the government has brought forward to help stimulate the economy after coronavirus. 

Now the company has put its troubles behind it and is planning to shore up its balance sheet, these additional contracts should help its bottom line. That could be great news for investors and the Kier share price. After several years of restructuring, it looks as if the business is back on a stable footing. Now it can concentrate on growth. 

Risks and challenges 

Having said all of the above, the company is still exposed to the risks that plague the construction industry. For example, profit margins are usually thin. That leaves little room for error if costs rise substantially. And that’s just what could happen considering the tight labour market and rising materials costs we see right now. As a result, rising prices could ultimately destabilise the group’s growth plans. 

Still, even after taking this risk into account, I’d buy Kier shares for my portfolio today. I think the stock has excellent recovery potential. However, I’d only initiate a small position, to begin with, in case the group’s turnaround falters, due to the risks outlined above. 

Overall, I think the Kier share price has potential, but this company might not be suitable for all investors.

I have to admit that the terms of the new funding are more favourable for shareholders than I expected. The outlook for the construction sector also seems positive. Should I be buying Kier shares for my portfolio ahead of a potential growth streak?

Looking good for Kier?

Kier has been struggling with its debt burden for the last couple of years. But I think the company may have turned a corner. The order book edged higher to £8bn at the end of December, despite the impact of Covid-19 and more disciplined contract bidding.

Profits were stable last year and the company’s cash generation improved.

Cutting debt is an essential next step, as it will give potential customers and subcontractors “greater confidence in Kier as a counterparty”. This is important for construction groups like Kier, which often need to lay out money in advance to mobilise major projects.

I’m impressed by the progress made recently by CEO Andrew Davies. In April, Mr Davies agreed a £110m deal to sell the group’s housebuilding business, Kier Living. When added to the money from this week’s fundraising, I estimate that Kier’s average month-end net debt could fall from £436m in December to perhaps £130m by the end of June.

Kier share price: cheap as chips?

The latest consensus forecasts suggest that Kier could generate earnings of around 30p per share this year, or a net profit of about £51m. As I write, the stock is trading at around 120p. This appears to value Kier on just four times forecast earnings.

This would be cheap, but it’s not accurate. Raising money by selling new shares will cut its debt, but it will result in a big increase in the number of shares in circulation. This will reduce earnings per share.

Kier’s figures show that this week’s fundraising will create 284m new shares. When these are added to the existing share count of 162m, it will have around 446m shares. 

Once this fundraising is complete, I estimate that at 120p, Kier stock will trade on a more normal valuation of 10.5 times forecast earnings.

I’m not convinced this is really cheap. The construction sector is generally a low-margin business and there’s always the risk that future projects will run into problems. Kier will also still need to prove it can deliver sustainable growth while generating enough cash to keep debt levels down. I don’t think there’s much chance of a dividend for the next few years either.

On balance, I think Kier looks fully valued at a share price of 120p. I’m not planning to buy the stock for my portfolio at this level, although I might be interested at a lower price.

The construction specialist has soared back through the £1 per share marker for the first time since mid-February 2020. At 112p per share, the Kier price was last 9% higher on the day.

Share placing

Kier has risen after issuing a statement concerning a planned capital raise that it had previously touted in late April. In its full-year financials, it announced plans to raise between £190m and £240m via a share placing.

Today Kier said that it plans to raise gross proceeds of £241m via a placing and open offer. It said that these funds would be used “to immediately reduce the group’s net debt and facilitate prudent investment in the business to allow the group to drive sustainable, profitable organic growth”. The construction firm ended 2020 with £353.5m worth of net debt on its books. This was up from £242.5m a year earlier.

Kier said that its lenders have agreed to extend its revolving credit facility to January 2025 following a successful equity raise, as per previous guidance. The business said that this will provide it with extra balance sheet strength “as it pursues its target of a net cash position within two to three years”.

Kier’s “final milestone”

Commenting on the planned share placing, Kier chief executive Andrew Davies said the capital raise “represents the final milestone in the group’s strategy to simplify the group; to improve cash generation; and to strengthen our balance sheet”.

Kier said it had “substantially delivered on the many self-help actions identified by management through the 2019 strategic review process”. As a consequence it considered now to be the time to complete balance sheet recapitalisation through a share placing.

The company said it now has “the appropriate cost base and ‘Performance Excellence’ culture embedded throughout the group to ensure contracts are won and executed on terms and values appropriate to their risk”. The firm is targeting at least £115m of annualised cost savings (compared to 2018 levels) by the end of 2021.

Kier said its medium-term plans include generating revenues of $4bn to $4.5bn and boasting an adjusted operating profit margin of 3.5%. It’s also targeting cash conversion of operating profit of 90% and a sustainable dividend policy “with dividend cover of around three times earnings”.

In the meantime, City analysts think Kier’s annual earnings will rise 104% in 2021. An additional 51% rise is forecast for 2022 too. These predictions mean the business trades on a forward price-to-earnings (P/E) ratio of 3.5 times at current prices. 

The rising Kier share price

Over the last five years, Kier racked up a lot of debt. But due to its already significant level of leverage, the management team also had to raise capital from shareholders and cut dividends to zero, just to keep the lights on.

Needless to say, this is not the hallmark of a healthy business. And the disruptions from Covid-19 didn’t exactly help matters. In fact, the Kier share price was still heading in a downward trajectory throughout most of 2020. But around the end of October, the stock suddenly started climbing again. And in the fourth quarter of last year, the share price increased by nearly 65%. What happened?

The firm published its full-year 2020 results. They weren’t exactly great, given both revenue and profits continued falling. However, there were some positive signs of recovery thanks to the restructuring process that is still underway. Free cash flow once again became positive, reaching £66m compared to -£89m in 2019. Meanwhile, the management team was able to achieve an annual cost saving of around £100m. And at the same time, Kier secured new contracts to push its order book up to £7.9bn by the end of June last year.

To me, this looks like the start of a potentially successful turnaround. And it seems investors agree because the rising Kier share price appears to have been triggered by the closing of prominent short positions.

What lies ahead?

While these results show some promise, the company still has a long road ahead. Debt levels continued to grow significantly in 2020. And now, these obligations represent nearly 82% of the firm’s capital structure. Given the limited level of underlying profitability, I wouldn’t be surprised if the management team decides to raise additional capital through investors to keep up with interest payments.

But I think it is worth mentioning that the CEO, CFO and Chairman of the board were buying up shares last year. Generally, this is an indicator that the management team believes that the Kier share price is too low and implies that the company can make a comeback.

The bottom line

Looking at the most recently published results, it looks like the turnaround plan is starting to bear fruit. As of December 2020, the total order book continued to rise to £8bn, and free cash flow stayed in the green.

However, as encouraging as these figures may be, the high level of debt is concerning, in my opinion. And it will likely require a multi-year process to bring it back under control, as will the recovery of the Kier share price. Personally, I won’t be adding this stock to my portfolio, because I think there are far better investment opportunities out there.

However, the group’s latest trading update suggests it’s made substantial progress rectifying historical issues. As such, I’ve recently been taking a closer look at this construction business.

Thoughts on the Kier share price

Whenever I stumble across a business I think looks cheap and might be candidate for my portfolio, I always try to understand why the stock has acted in the way it has. 

Concerning Kier, I can understand why investors have avoided the business over the past few years. Since 2016, the group’s profitability has collapsed. And, within the last three years, the organisation has had to ask shareholders for £250m to keep the lights on. The company also eliminated its dividend to investors. 

I tend to avoid businesses that are losing money and need to raise more cash from shareholders. So, I can understand why the Kier share price has been falling since the beginning of 2016.

Nevertheless, the company’s performance has improved recently. Last week, it revealed statutory half-year profits would be “materially better” than a year ago. Lower one-off items helped keep the business in the black. What’s more, Kier said revenue would be “slightly above” the board’s expectations. The group also reported its order book would be at the £7.9bn year-end level after several contract wins.

Debt issues 

On the downside, the company reported it had average monthly debts of £436m in the period. This seems to be more than management is comfortable with. The group said it’s considering yet another equity raise in the same trading update. The proceeds may be used to strengthen the balance sheet. As I mentioned above, I tend to avoid businesses that need to raise money from investors. So, for me, this statement is concerning. 

That being said, if shareholders support the cash call, the additional capital could help Kier strengthen its balance sheet. This additional capital, coupled with the company’s “materially better” profits for 2020, may improve the Kier share price outlook.

A turnaround in progress

Based on the latest trading updates from a company, it looks as if Kier’s outlook is improving. However, the business isn’t out of the woods yet.

As it’s latest trading update shows, the business may need to raise additional capital from investors. This suggests that while group revenues and profits are performing better than expected, investors may not see positive returns from the stock any time soon. Still, if the organisation can get the capital raise off the ground, and put its balance sheet issues behind it, the Kier share price may have a brighter future. 

Personally, I wouldn’t feel comfortable supporting a business that’s made so many mistakes. However, there’s no guarantee these past issues will repeat themselves in future.

The company has lurched from disaster to disaster over the past five years. As a result, investor sentiment has plunged. 

From a price of nearly 1,500p just three years ago, the stock is now changing hands at a shade under 50p, its lowest level since the company’s IPO in 1996. 

Granted, the group is still trying to work through some severe problems. However, I think this could be an excellent opportunity to buy this business at a discount price. Today, I’m going to explain why. 

Kier share price value 

In 2017, the construction group was flying high. Profits were rising,  balance sheet looked clean, and management was able to pay a hefty annual dividend of 66p to investors.

Unfortunately, over the next few years, the company’s growth story started to unravel. Cost overruns caused losses to spiral and concerns about its balance sheet began to surface. 

Management had to act quickly to stabilise the enterprise. The company tapped shareholders for extra cash, slashed costs and sold assets. It seems as if these initiatives have paid off.

The company is now on a much more stable footing than it was two years ago. But this isn’t reflected in the Keir share price. Investors have continued to sell the stock despite its improving fundamentals. 

I think it may be worth taking advantage of this disconnect. City analysts are expecting the company to report a net profit of £59m for fiscal 2021, that’s around 33p per share. This puts the Kier share price on a forward price-to-earnings (P/E) multiple of 1.4. No matter what one thinks the business, that’s dirt cheap. 

At the same time, as one of the largest construction groups in the country, Kier could benefit in the years ahead from government stimulus.

Government stimulus

Boris Johnson as already said the UK would spend £100bn over the next few years on infrastructure projects. Keir could be one of the primary beneficiaries of this. That suggests the company’s sales could grow steadily in the years ahead. Even without the additional spending, the firm has the potential to earn steady profits based on its past performance. 

Several years of profitability and cash generation will alleviate concern about the company’s balance sheet. This would, hopefully, lead to improved investor sentiment towards the business. The Keir share price should increase in value as a result.

Even a slight improvement could lead to significant returns for investors. Indeed, the UK construction sector is trading at an average P/E of 8. Even if Keir’s valuation was just half of this average, the stock could rise by more than 150% from current levels, according to my calculations. 

That’s why I believe the Kier share price could be one of the best opportunities on the market today, considering the company’s outlook and recent progress in reducing costs.

However, I also noted that there were a few issues that concerned me. Kier’s high level of debt was one. Analysts’ earnings downgrades were another. So, I wasn’t prepared to rate Kier shares as a ‘buy’.

In hindsight, that was the right decision. Since my article, the shares have fallen from 78p to 50.6p – a decline of 35%. So, why has Kier’s share price fallen recently? And what’s my view on the stock now?

Why has Kier’s share price fallen?

One reason the share price has continued to fall recently is that full-year results published on 17 September were quite disappointing.

These results, which the group said reflected “nine months of good strategic progress and three months’ impact of Covid-19,” showed a drop in operating profit of 52% and a fall in adjusted basic earnings per share (EPS) of 50%. They also showed an 86% increase in net debt to £310.3m.

“This financial year has been a difficult one for the group,” commented CEO Andrew Davies. Looking at these results, it’s clear that the company has been impacted significantly by Covid-19.

Another reason Kier’s share price has fallen is that City analysts have continued to lower their EPS forecasts for this year. Over the last month, for example, the consensus EPS forecast has fallen 11% to 33.3p. Earnings downgrades tend to put downward pressure on a company’s share price.

My view on Kier shares now

In light of the recent developments here, I see Kier shares as quite risky at present.

One issue that concerns me is the high level of debt. At 30 June, Kier had total equity on its balance sheet of £240.8m. So, its net debt-to-equity ratio (£310.30/£240.80) is 1.3. That’s a little too high for my liking.

I’ll point out that Stockopedia gives Kier an ‘Altman Z2’ score (this is a measure of financial strength) of -1.65. This indicates a ‘serious risk of financial distress’ within the next two years.

Another thing that concerns me a little bit is that no directors have purchased Kier shares in recent months. Even when the share price fell below 50p, no insiders stepped up to buy shares. This suggests that Kier shares may not be a bargain even at the current low price-to-earnings (P/E) ratio of just 1.5.

All things considered, I think the shares are best avoided for now. They may rebound at some stage. However, in my view, there is still risk to the downside.  

Why take a huge risk on Kier shares when there are so many great companies you could invest in right now?

As restrictions have begun to ease, sites have now reopened, and construction has begun once more. It is worth noting that Kier is a major player in the industry. There is a good chance you will have visited a facility built by them or used a service installed by Kier. Some of their projects include museums, office buildings, rail networks, retail outlets, and fibre broadband installations.

Kier is an interesting stock as it’s share price has plummeted in recent times. At such a current cheap price, is this a bargain stock with bounce back potential or one to avoid?

Share price woes

Kier’s share price has decreased by over 90% in the last five years. In July 2015, it stood at over 1,400p per share. As I write this, its price is just above 70p. In more recent times, Kier’s share price is down over 12% from this time last year. Before arriving at its current price, its share price had begun to recover somewhat, close to 150p in February of this year. Unfortunately due to the crash, prices across the markets tumbled.

A noteworthy point for potential investors is that some insiders have been purchasing shares recently. In March, CEO Andrew Davies, CFO Simon Kesterson, and Chair Matthew Lester all purchased shares in KIE.

Trading update

KIE released a trading update on 1 July that I found mostly positive. The update confirmed that 80% of Kier’s sites remained open during the lockdown period. Due to this, its performance remained resilient. Kier confirmed almost all sites are now back open.

One of the major takeaways from the update for me was Kier’s order book value. As at 31 May 2020, the order book’s value stood at £7.6bn. Of this amount, 60% were in government contracts and 25% to regulated entities. Government contracts are always a positive sign for me as the government will pay its bills on time. Other positive segments from the update pointed towards new projects such as multiple hospitals and a ‘notice to proceed’ on the HS2 project.

My verdict on Kier

Kier is an integral part of the government’s plan to spend £100bn on new infrastructure projects across the country. Despite this, and its extensive order book, there are too many negative factors for me.

One of my biggest concerns is the company’s debt levels. In the trading update from July, KIE advised its average month-end net debt for the current year is expected to reach £440m. If you compare that against equity on the balance sheet at 31 December 0f £519m, that is very concerning. Debt in any economic climate is worrying, but especially in the current unpredictable climate.

Kier’s price-to-earnings ratio is rather low, sitting at just over 2. Brokers are continuing to downgrade their earnings forecast for KIE. 

Overall, I feel there is potential for things to turn around for Kier but it is one I would avoid and keep an eye on. There are other shares out there that offer a better level of safety and return than Kier in my opinion.