Kier moots fundraising of up to £240m to cut debt

Kier (KIE) has ramped up efforts to bolster its balance sheet, announcing plans for an equity raise of between £190m and £240m via a placing and open offer in the coming weeks. 

The group is grappling with a rising debt burden, which on a net basis (ex lease liabilities) jumped by almost half over the 12-month period to £354m. Last week it announced the sale of housebuilding business Kier Living for £110m, subject to shareholder approval, which will contribute towards reducing leverage. 

Management has unveiled a set of medium-term targets, aiming for revenue of £4bn-£4.5bn and an adjusted profit margin of around 3.5 per cent. To achieve these goals, management is hoping to capitalise on government rhetoric around boosting infrastructure spending, as well as utilities projects such as the rollout of 5G.  

“The key is getting the discipline into the contracts you take,” said chief executive Andrew Davies. That has previously not been a strength for the group. Yet, having sold the facilities management and environmental services businesses and exiting loss-making contracts, additional measures have been put in place to assess risk at each stage of the projects it takes on. 

Investors will be hoping this fundraising goes better than the calamitous 2018 rights issue, which was taken up by just over a third of shareholders, with underwriters taking up the slack. Progress in simplifying the group’s operations and cutting problem contracts may prompt investors to look more favourably on Kier. 

Consensus forecasts are for an improvement in earnings to 14p a share this year, which leaves the shares trading at seven times forward earnings. Given the competitive challenges associated with achieving those revenue targets and ultra-thin margins associated with the sector, that valuation does not seem compelling. Sell. 

Last IC View: Sell, 87p, 1 Jul 2020