In January, I was cautiously optimistic about Kier Group (LSE: KIE). The dividend was set to be cut right back as part of the infrastructure developer’s plan, along with a rights issue, to beef up its balance sheet.
At the time, I said: “Before I’d buy, I’d want to be convinced that the feared liquidity crisis has been averted, the mooted dividends look sustainable, and Kier’s performance is solid.”
Shock
And, wow, I’m so glad I waited! With a shock profit warning out of the bag on Monday, the Kier share price plunged 40%.
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As recently as interim results in March, executive chairman Philip Cox said the board was “maintaining its underlying FY19 expectations, with the full-year results being weighted towards the second-half of the financial year, as expected.”
But under the leadership of new CEO Andrew Davies, who took charge in April, we hear volume pressures are continuing. Revenue is now expected to be around the same as in 2018, with underlying operating profit put at around £25m below last year’s figure.
Also, the company’s “future proofing” programme is likely to cost around £15m more this year than previously thought. Kier says that’s partly due to an acceleration of the programme under Davies, and that reminds me of something I’ve seen so many times before. It so often takes the appointment of a new boss to fully shake out what’s wrong with a company and lay it at the feet of shareholders.
Shake-up
Maybe a new chief can see things in a more harshly realistic light, having not been part of the old management structure upon whom the company’s difficulties have crept gradually. New brooms, and all that.
I’m becoming increasingly wary when companies needing a turnaround install new management. On the face of it, it looks like a good move — get a new head with a clear new vision. But whenever I read such things, I increasingly ask: “Uh-oh, what other bad news are they going to uncover?“
I don’t have figures for how often the appointment of a new boss is followed by things getting significantly worse before they get better, and I’m more likely to remember the “getting worse” examples than the “all fine” ones.
Caution
But my conviction is increasing that the arrival of a new boss at a troubled company is a sure sign to hold back and wait and see. And when a company drops an initial bombshell as Kier did in November with its rights issue, especially if it’s balance sheet-related, I say just keep away until after everything is proven to be fixed and back on track.
Upbeat sentiments accompanying what can best be read as “oops, we’re up to our necks in it” announcements are to be treated with utmost caution as, almost without exception, company announcements are written with the best positive spin a firm can manage.
And I still maintain a company that keeps big dividends going until it gets into such a state that it needs a rights issue to fix its balance sheet is a company that is failing its shareholders.
