Kier share price hits 23-year low; should investors expect a turnaround?

Kier's [KIE] share price plunged by more than 40% on 3 June after it warned investors that it expects full-year operating profits to be £25m lower than previously anticipated, adding to fears over the health of the UK construction sector. 

Kier expect to report a significantly higher net debt position in its upcoming financial year-end results on 30 June as a result of “volume pressures” within its highways, utilities and housing maintenance businesses. It has also said its streamlining programme, Future Proofing Kier, will cost around £15m more than expected.Kier's 1-year share price performance, CMC Markets, 12 June 2019

While the company’s net debt had seen a 24% year-on-year decrease in its interim results, its total debt-to-equity ratio of 127.14 is substantially higher than the industry’s 43.35.

Trouble ahead for Kier

The company’s return on investment (TTM) of 1.37 is also well below the sector’s 6.98 average, and following its profit warning shares are expected to continue to perform badly as investors look to see if there are any more operational issues that haven’t been disclosed. Its share price kept falling, and hit a low of 145.40p on 6 June, a level not seen since it floated on the London Stock Exchange in 1996.

Stephen Rawlinson, a director and analyst at consultancy firm Applied Value, said a concern for investors should be the fact that Kier’s latest update doesn’t provide sufficient information to evaluate the business “financially or strategically”. “They don’t know where the bottom is yet, that’s the problem,” he told the Financial Times. “The story is about simplification, but it’s not yet clear what that means.”

Kier share price vitals, Yahoo finance, 12 June 2019

This isn’t the first time Kier has been in trouble with investors. Late last year, the company was forced to launch a £264m rights issue in a bid to clear debts, which spurred a group of activist shareholders to force out then-CEO Haydn Mursell. In March, Kier suffered further embarrassment when it announced a £25m write-down as a result of an accounting error.

UK construction sector shrinks on Brexit uncertainty 

Kier’s profit warning comes shortly after Interserve went into administration and while the collapse of Carillion is still being felt – putting the UK outsourcing sector’s troubles centre stage. 

Indeed, lower workloads have led to sharp declines in output and the purchasing of construction materials, causing the UK construction PMI to fall 3% from the previous month to 48.6 in May, according to the latest IHS Market / CIPS UK Construction Total Activity Index report.

“With the continuing uncertainty around Brexit and instabilities in the UK economy, client indecision affected new orders, which fell at their fastest since March 2018 and particularly affected commercial activity,” Duncan Brock, group director at CIPS, said. “The previously unshakeable housing sector barely kept its head above water, growing at its weakest level since February as residential building started to lose momentum.”

“With the continuing uncertainty around Brexit and instabilities in the UK economy, client indecision affected new orders, which fell at their fastest since March 2018 and particularly affected commercial activity” - Duncan Brock, group director at CIPS

Shares in competitor Capita [CPI] have also suffered, falling by 4% in the year to 10 June as investors have been warned of cost cuts and reduced orders. 

While the setback has immersed the industry into widespread uncertainty, some analysts are optimistic of an improving scenario. According to data from Trading Economics, analysts expect the construction PMI in the UK to recover in the next 12 months to stand at 53.40.

Outsourcing sector woes attract short-sellers

With shares in Kier currently trading at around 60% below their 200-day moving average of 421.79p, an increasing number of short-sellers have taken positions against the stock. According to data from Short Interest Tracker, BlackRock Investment Management, Kuvari Partners and Marshall Wave have short positions of 1.13%, 1.5% and 2.06% respectively. 

The appetite to short Kier’s stock has also been fuelled by the suspension of Neil Woodford’s equity income fund on 4 June, which owns nearly 10% of the company.

A chance for recovery

Increased short interest doesn’t mean there is no chance for Kier’s share price to recover, though. Indeed, the construction firm could look to rival Serco Group [SRP] as an example of how to turn its business around. Serco’s shares have recovered by more than 27% in the past year thanks to big contract wins and the acquisition of US defence technology group Alion’s naval engineering arm. 

Kier’s board and shareholders will be waiting to see what CEO Andrew Davies announces when he reveals the results of his strategic review of the business on 30 July – and particularly how soon he expects to be able to lead the company out of the red.