The Kier (LSE: KIE) share price has fallen an incredible 90% over the last 12 months. However, an eventful AGM at the end of last week included good news. The company told investors: “The group is trading in line with the board’s expectations.”
The shares finished 1.7% up on the day at 89.15p. With City analysts forecasting earnings of 48.5p per share for the company’s current financial year (ending 30 June 2020), the stock is on offer at an extraordinarily low valuation of just 1.8 times earnings. Could this once-FTSE 250 (but now small-cap) stock be the buy of a lifetime, or is its rating simply too good to be true?
Good news
To flesh out the good news in Friday’s trading statement, the company said it continues to focus on operational cash generation, with working capital and net debt both in line with the board’s expectations.
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It said that since 30 June 2019 it’s been awarded £1bn of new contracts and been appointed to a number of frameworks, including the £30bn Construction Works and Associated Services framework for the Crown Commercial Service.
Finally, it also said it remains on course to deliver a headcount reduction of 1,200 by 30 June 2020 and annual cost savings of at least £55m in the financial year ending 30 June 2021.
Good news all round then, except for those receiving their P45s.
Management changes
Chief operating officer Claudio Veritiero has been coshed. Friday’s statement told us he’s leaving the company with immediate effect, his responsibilities being assumed by the chief executive and chief financial officer.
Veritiero’s departure means every executive director in Kier’s boardroom when chairman Philip Cox arrived in 2017 has now been ousted. Cox himself will leave once the company’s found a replacement.
However, an investor revolt at the AGM, with a 54% vote against the firm’s executive pay policy, was due not only to anger at the ‘reward for failure’ of the old guard, but also criticism of the remuneration packages of new chief executive Andrew Davies and new chief financial officer Simon Kesterton. Clearly, there’s ongoing disaffection with the company among major shareholders.
The D-word
However, my number one concern with Kier is its debt. Net debt at the last financial year-end stood at £167m (despite earlier management guidance of net cash), and average month-end net debt over the year was £422m. Put this against year-end negative net tangible assets of £247m and the company’s current market capitalisation of £145m, and I think I’m right to see debt as a huge concern.
Furthermore, lenders are said to be running scared about the company’s future, with the Sunday Telegraph reporting a couple of weeks ago that HSBC and others are trying to offload their Kier loans to distressed debt specialists for as little as 70p in the pound.
This is ominous for shareholders, because when lenders (who rank above shareholders) are pricing debt at a hefty discount, it raises serious doubts about the value of equity. Friday’s trading statement, which revealed no tangible progress on the sale of assets Kier has earmarked for (debt-reducing) disposal, will have done nothing to reassure lenders.
The situation at Kier may attract speculative share traders. Personally, I see it as far too risky. I’d avoid the stock with the proverbial implement for manoeuvring canal boats.
