Kier (KIE) appears to have made an unfortunate habit of springing unpleasant surprises on its shareholders. This week, an unscheduled trading update has cautioned that underlying operating profit for FY2019 would fall around £25m short of expectations, while full-year revenue is expected to be broadly flat year on year. As the new chief executive accelerates the implementation of the 'Future Proofing Kier' programme, associated net costs will be £15m higher than previously expected.
Given the group is likely to report a net debt position at the end of June, this is expected to have an adverse impact on the FY2019 average month-end net debt position. Peel Hunt now forecasts net debt of £60m for FY2019 (from £15m net cash). Although an improvement from the £181m of net debt at the half-year stage, as lenders and clients become increasingly risk-averse towards the construction sector, further measures are required to address persistent debt. Arguably, the true scale of net debt is obscured by the group’s accounting of supply-chain financing as working capital rather than debt.
Given the lacklustre enthusiasm last time around, a second rights issue looks out of the question – although the November cash call raised the intended £250m of net proceeds, shareholders opted to take up just 38 per cent of the offer, saddling underwriters with the remaining heavily discounted shares.
Instead, a major restructuring seems likely. “It is inevitable that one or more of the businesses has to go. It’s the only way to materially shift the net debt profile,” said Numis's Howard Seymour. He identifies three targets for disposal: property development, residential and housing maintenance. Divesting the struggling development and housing assets means Kier could emerge as “a strong regional construction business and a services business focused on highways and utilities”, Mr Seymour said.
But this understates the extent of Kier’s problems. The profit warning is also rooted in the infrastructure services division, where persistent volume pressures in highways and utilities are squeezing already wafer-thin profit margins. Despite double-digit order book expansion in the buildings business – which accounts for over 40 per cent of group turnover – revenue growth will also fall below expectations.
Numis forecasts adjusted pre-tax profit of £113m and EPS of 69.8p in 2019, rising to £152m and 76.0p in 2020, but the full-year dividend is expected to drop by almost 80 per cent to just 15p a share.
