Shares in crisis-hit construction group Kier (LSE: KIE) have crumbled over the past 12 months. From a 52-week high of 1,195p, the stock is currently changing hands at 110p, a decline of around 91%.
As confidence in the company has evaporated, management has decided to swing the axe, announcing substantial job cuts and asset sales earlier this month. As part of the new turnaround plan, Kier is planning to cut 1,200 jobs and sell its home building business.
However, I don’t think this plan goes far enough, and I think there’s a strong chance the company will have to ask shareholders for more money shortly.
Weak balance sheet
As part of its turnaround, Kier has announced it’s suspending its dividend for two years, is planning to sell, or “substantially exit” its housebuilding business Kier Living by the end of 2019, and will reduce costs by £55m a year from 2021. These efforts will go some way to improving the company’s finances. But what I’m apprehensive about is the group’s debt.
Management has told the market the company’s debt will peak at £600m-£630m, leaving plenty of headroom on debt facilities of £920m. They’ve also said the average monthly level of debt will be much lower at between £420m and £450m.
These figures don’t really give us the whole picture because Kier has a lot of off-balance sheet debt, which management doesn’t tend to talk about, such as debt inside joint ventures. Some estimates put the real level of debt, including off-balance sheet borrowing, at more than £1bn, a figure that completely eclipses the emergency funding of £264m Kier tried and failed to raise last year.
Another cash call?
If the company does manage to execute a turnaround and creditors give it breathing room to pay off some of its obligations, then this debt might be sustainable. But I’m sceptical. Kier has a considerable amount of work to do to restore trust with its stakeholders, and the business has never been particularly cash generative.
According to my calculations (based on Kier’s own numbers), between 2016 and 2018, the company generated an average free cash flow from operations of around £90m per annum, barely enough to cover its £50m per annum dividend distribution to investors, and certainly not enough to make a substantial dent in its colossal debt pile.
With profits under pressure and suppliers demanding payment upfront, it doesn’t look as if this cash flow position is going to change anytime soon. That’s why I think management is going to have to go back to shareholders to ask for more money.
Considering the fact that Kier’s current market capitalisation is only £180m, if the company has to raise a substantial amount of money, shareholders could be facing a significant further loss on their investment. That’s why I think the Kier share price could fall another 90% from current levels.
