It appears the ‘kitchen sinking’ from Kier (KIE) has finally arrived. As shares plummeted a further 35 per cent on the day The Times reported that two trade credit insurers had withdrawn coverage, the group’s hand was forced. Revealing the sheer scale of its indebtedness, a last-ditch attempt to regain investor confidence saw the group unveil the conclusions of its much-awaited strategic review on Monday 17 June, well ahead of the original 30 July release date.
Net debt this year is set to exceed market expectations while average month-end net debt will increase to £420m-450m – far above Peel Hunt’s estimated £360m, prompting Liberum to increase its year-end net debt forecast from £36m to £200m. Unsurprisingly, dividend payments for FY2019 and FY2020 have been suspended.
As expected, newly-appointed chief executive Andrew Davies unveiled a significant restructuring, divesting assets to address spiralling debt. A new strategy will focus on regional building, infrastructure, utilities and highways, simplifying the portfolio by selling or (rather vaguely) “substantially exiting” non-core activities – Kier living, property, facilities management and environmental services. What “substantially exiting” means, remains to be seen – continue to run what is left over after asset sales or close the business units completely? Stephen Rawlinson of Applied Markets believes the group will “wind down the remaining contracts…and find people to take them on”.
By divesting the residential business, the group aims to reduce its working capital requirement by £50m, supply chain finance by £35m and so-called “off-balance debt” by £110m. Under plans to reduce exposure to capital intensive activities, the group will curb the average level of capital invested in the property business to £100m in FY2020 (from £184m during the latter half of 2018), “which may extend to a sale”. Facilities management and environmental services will be exited “in due course”.
Disposals are unlikely to be straightforward, with joint ventures in both the residential and property businesses introducing complications. “It will slow it down time-wise”, said David Madden of CMC Markets, “something Kier is short of”. The other question is how much money can realistically be raised – a fire sale of assets is unlikely to restore investor confidence, but can Kier afford to be so selective? As Mr Rawlinson highlighted, Kier is “a forced seller in a buyers’ market…if they are able to get what they believe is the net asset value then they will be quite fortunate”.
With the housing maintenance division suffering volume pressures and continued budgetary pressures on housing associations and local authorities, it is somewhat perplexing that the group has opted to retain these operations. Mr Rawlinson is frank in his assessment: “[They] probably can’t get a buyer for it.” Similarly, given that sustained volume pressures in highways and utilities contributed to the recent profit warning, it is also surprising the group has opted to keep these segments intact. In a call with analysts, Mr Davies said the board continued to see "medium-term opportunities" with the division and would manage it under a "strict criteria".
Kier has confirmed that some trade credit insurance has been withdrawn, a move that could trigger an exodus and see suppliers tighten contract terms, further increasing the group’s financial pressures. Joe Brent of Liberum believes that “while expected net debt of £200m seems manageable the total creditor stack is too large”. With lower than normal customer pre-payments, “it reflects how the industry itself sees where Kier is going,” said Helal Miah of The Share Centre. “Investors don’t have confidence in Kier, but there is also no confidence among customers and suppliers,” he said.
A fundamental restructure under the accelerated Future Proofing Kier programme will see headcount reduced by around 1,200. The programme is expected to deliver annual cost savings of £55m from FY2021, but will incur £56m in costs over the next two years.
