The Kier Group (LSE: KIE) share price has fallen by 94% over the last five years. During the last year alone, shareholders have seen the value of their holdings drop 80%.
However, with a cost-cutting plan in progress and contract wins still rolling in, is it time to rethink? After all, Kier shares currently trade on just 2.3 times 2020 forecast earnings — a potential bargain if these wins can be sustained.
Latest trading
Kier started the year with an upbeat trading update. According to boss Andrew Davies, the company is managing to cut costs while continuing “to win work from our customers”.
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And a highlight of the final six weeks of 2019 include being appointed to “all 20 lots of the four-year £8bn Procure Partnerships Framework” in November.
As far as I can tell, this means that Kier is on a shortlist of approved contractors for future government contracts. It doesn’t mean the firm has won £8bn of new work. It’s good news, but not necessarily an immediate money-spinner.
The group’s main problem remains debt, of which it has too much. Have borrowings started to fall yet?
Housebuilder sale should cut debt
Mr Davies said that average month-end net debt for the six months to 31 December was “in line with the Board’s expectations”. Unfortunately, the company hasn’t said what those expectations were.
This is important because Kier’s average month-end net debt was £422m during the 2018/19 financial year. That’s 2.5 times its year-end reported figure of £167m. If I was going to buy the shares, I’d like to know whether the company has been able to reduce its monthly borrowing needs.
I suspect that nothing much has changed. The main hope for debt reduction seems to be the planned sale of Kier’s housebuilding business, Kier Living.
It’s hard to know exactly how much this business might be worth. But using the recent sale of Galliford Try‘s housebuilding business to Bovis Homes (now known as Vistry) as a guide, I reckon Kier Living could fetch £200m-£250m. That would provide a useful boost.
Woodford worries continue
I also have another worry. Fund manager Neil Woodford was a major shareholder in Kier. On 16 July last year, he controlled 14.1% of the group’s shares.
Most of Mr Woodford’s listed holdings have since been sold by his fund’s administrator. But as far as I can see, Woodford still controls that 14.1% of Kier stock. I can’t find any trading reports that show a reduction in this holding.
If the fund’s administrator still hasn’t been able to find a buyer for Woodford’s Kier stock, then for me that’s a further warning that the company’s troubles may not be over.
My decision
I think there’s a small chance that Kier stock could bounce back and deliver big profits for shareholders. But I think it’s more likely that the shares are correctly priced at current levels.
Selling the housing business may make sense, but it will strip out one of the most profitable parts of the business. What’s left will be a large construction business with lower profit margins. I don’t see much attraction in this.
Kier may not be a bad business, but I don’t think it will ever be a great one. I’m pretty sure I can find better places to invest my cash.
