It’s painful to see infrastructure and construction contractor Kier Group (LSE: KIE) still down 90% over the past five years. Even the 2021 recovery has gone off the boil, and the Kier share price has been sliding again in 2022. But I believe I’m seeing signs of renewed strength, and I think Kier shares could be undervalued now.
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.
