Kier's struggles go on

With lenders curtailing exposure to the construction sector and clients increasingly scrutinising service providers’ balance sheets, mounting debt forced a rights issue on Kier. In November it raised £250m of net proceeds. Considering that net debt had soared from £186m in June 2018 to £624m by October, it is little wonder investors were reticent – shareholders opted to take up just 38 per cent of the offer. Underwriters were lumbered with the remaining discounted shares, the value of which plunged by over 30 per cent. At the December half-year stage, net debt therefore stood at a reduced £181m (from £239m in H1 of 2018) even though average month-end debt had surged by 23 per cent to £430m.

With a startling likeness to Carillion in its accounting of supply-chain finance, Kier’s true net debt situation has arguably been understated. Ostensible borrowing from banks to pay suppliers earlier than the standard payment term is classified in the balance sheet under 'trade and other payables' – a working capital item rather than debt. With 60 per cent of subcontractors using the early payment scheme, the amount of supply-chain finance has been increasing – it was £201m in December, up from £175m a year earlier. 

According to data compiled by the Builders' Conference, Kier has remained in the top three companies for winning construction contracts from January to April this year. Securing £2.1bn of contracts in the first half of 2018-19, the order book has increased to £10bn. However, significant non-underlying charges bring contract selection into question. A £26m provision for the early termination of a lossmaking waste collection contract follows similar exceptional costs of £11.1m in 2017 and £35.6m in 2016. Volume pressures are squeezing already thin profit margins. In infrastructure services, a shift in the overall mix of highways work from maintenance to lower-value capital projects led to a 0.6 percentage point drop in the underlying operating margin to 4.9 per cent for the latest first half, translating to a 5 per cent decrease in operating profit.