UK's second-largest construction contractor Kier Group has had a very rough year, with its stock price falling more than 75 per cent. At just 96.75p, Kier shares are now cheaper than ever and can seem like a good buy. So is Kier worth buying – or avoiding like the plague? In order to make a Kier share price forecast, it’s essential to look at the fundamentals first.
Key facts about Kier Group
Kier's business is quite diverse. It builds housing properties, as well as infrastructure and civic projects, including shopping malls, office spaces, and the new building of the Supreme Court in London. Kier is also involved in the HS2 (High-Speed 2) project – a new high-speed railway that will link 21 cities in the UK at a speed of more than 220mph. The group is also active in facilities management and maintenance.
How did Kier end up in such trouble?
It’s impossible to make a balanced Kier share price forecast without going back to the root of the company’s problems. Kier's current debts stem from a string of large acquisitions made in the past seven years. This strategy succeeded in making the group number-two in the UK construction market after Balfour Beatty. This was helped by the fact that another giant company, Carillion, went bankrupt in 2018. However, the desire to build an empire cost Kier very dearly – as should be clear from this Kier Group share price graph:
In 2013, the group bought May Gurney for £221m. This was followed by the purchase of Mouchel for £265m in 2015 and McNicholas in 2017 for about £20m. Unfortunately, none of these acquisitions proved particularly profitable. The company's average month-end net debt increased to £410m.
The company was clearly strapped for cash: it was revealed that it took Kier more than 50 days to pay its suppliers, while the limit imposed by the UK government is 30 days.
Raising money from banks was difficult: after the collapse of Carillion, banking institutions were unwilling to lend to construction companies. Kier had to find another way.
The rights issue: the solution that proved worse than the problem
On November 30, 2018, Kier announced it would be launching a £250m rights issue. In other words, it would issue new shares and offer its existing shareholders the right to buy them at a discounted price. Shareholders could also sell those rights in the open market as a way to compensate themselves for the dilution of stock.
The market didn't take the rights issue announcement well. Since it was made on a Friday and so close to Christmas, it was viewed as a panic move. As a result, KIE shares lost more than 40 per cent of their value in just three days and the company lost its place in the FTSE 250 index. Soon the market price fell below the preferential rights issue price to 385p: it made no more sense to participate in the rights issue at all.
The outcome of the rights issue was deplorable: only 38 per cent of the newly issued shares were bought. Still, Kier claimed that the issue helped reduce the average month-end debt to £370m. However, by March 2019 the company had to revise the figure to £430m. Already by this point, many analysts changed their Kier share price forecasts to negative.
The ongoing restructuring
After Kier CEO Haydn Mursell resigned in late January 2019, his position was taken up by Andrew Davies, former CEO of Wates Group. (He was actually supposed to become the new CEO of Carillion, but the company went bankrupt just before he could take over.)
In spite of the change in leadership, in 2019 things went from bad to worse. The group lost about £50m due to two problem contracts – a hospital and a waste collection facility. On June 3, Kier published a profit warning saying that it would make £25m less than forecasted previously. Davies' also announced a massive restructuring: the company would sell off some of its most profitable divisions, including housing construction and facilities management.
Trade Kier Group PLC - KIE CFD
Moreover, Kier would cut 1,200 jobs, and dividend payments would be suspended until at least 2021. The group would even sell its headquarters. Finally, in September Kier announced a £245m pre-tax loss for the 12 months to June 2019.
What’s the Kier share price forecast for 2020?
As of December 27, 2019, KIE shares were trading at 96.75p, which can seem like a real bargain – as long as the company's standing improves in 2020, of course. There are a couple of factors working in favour of Kier:
- The sale of the housing and property management divisions is apparently going well, so Kier will probably have much more cash at its disposal in the coming months
- The Conservative victory in the December elections can help start a new upward trend in construction and the UK business as a whole, especially since the Brexit issue will likely be resolved soon.
On the other hand, there are negative factors, too:
- Kier's market cap has fallen to just £145m (compare this to the 250m rights issue in November 2018). In these conditions, it will hardly be able to raise more money from its shareholders or banks.
- The divisions being sold are also the most profitable ones, with the property management business yielding an operating margin of 18 per cent (compared to less than 4 per cent in other construction and infrastructure projects).
Some market experts feel that the construction giant has fallen so low that the only remaining way is up - making the overall outlook quite positive. In fact, Financial Times analysts' median Kier share price prediction for 2020 is 150p, which is 55 per cent higher than the current price. Keep in mind, however, that Kier's problems can also prove to be too much for it to handle and it might meet the same fate as Carillion.
So, to buy or not to buy? If you have an exceptional appetite for risk, now could be a good moment to enter. But it's probably be wiser to wait a few months, see how the restructuring process goes and do a new analysis. If Kier successfully manages to sell several of its divisions and regain the City's trust, the Kier Group share price forecast might become much more attractive.
Contributor: Alisa Orlova.