Slimmed down Kier breathes more easily

Kier Group (KIE) looks to be in better shape after an exercise which has seen it shed debt and beef up its balance sheet through its second equity raise in three years.

The company had been jolted into action prior to the pandemic, after a financial health scare following an accounting mishap led to its debt pile being £50m higher than anticipated. This came just months after shareholders largely shunned a £250m capital raise.

Its restructuring plan has seen it reorganise existing businesses and offload others. Housebuilding arm Kier Living was sold to a company owned by Guy Hands, the head of private equity firm Terra Firma, for £110m in May.

The proceeds of this and a £241m rights issue completed in the same month have helped the company to reduce a net debt burden (including leases) that topped £510m at the end of its last financial year to £173m by the end of June.

It has sacrificed some revenue, but is now profitable and has improved its operating margins – although as with most contractors, they remain thin. Adjusted operating profit now stands at 3 per cent, compared to 1.2 per cent last year.

Management says the company is more focused on executing contracts “with appropriate risk / reward” in its three core areas of construction, infrastructure and property.

Its order book, at £7.7bn, is below the £8bn it reported in December, with pandemic-related procurement delays blamed.

Recent wins have included a £200m highway maintenance contract for Transport for London and a £50m deal to carry out enabling works for Phase 2a of the High Speed Rail project.

A medium-term value creation plan is based on reviving revenue to £4bn-£4.5bn, while making sure the company earns adjusted operating margins of around 3.5 per cent and converts 90 per cent of this into cash. This suggests earnings of about £150m a year, Liberum analyst Joe Brent said. He maintained a target price of 150p on the shares, which have shot up since they were identified as a deep value stock in a screen by Algy Hall in May (see 12 dirt cheap shares). As he pointed out, things only needed to get a little less horrid for Kier for investors to make money, which they have.

However, it still needs to show the shareholders it keeps tapping for funds that it has the ability to use them wisely. Hold.

Last IC View, Sell at 89.5p, 21 April 2021