The last time I covered the Kier (LSE: KIE) share price, I noted that while the company had its problems, if it could get its house in order, the stock could surge.
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.
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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.
