Is Kier Group worth buying after its post-profit-warning share-price plunge?

Shares at construction and outsourcing contractor Kier Group have taken a nosedive. Matthew Partridge examines why and asks if now is a good time to buy.

190605-kier

1130364499

© 2019 SOPA Images

What's happened at Kier?

Shares in engineering services firm Kier Group (LSE: KIE) plunged on Monday morning on news that the company expects profits to be £40m less than expected. The new CEO, Andrew Davies, has blamed some of the difference on higher than expected restructuring costs. But at least £25m of the difference is due to the reduced demand for its services. Davies also said that it will take longer than expected for Kier to generate positive cash flow.

Is this the first time Kier has been in trouble?

This isn't the first time questions have been raised about Kier. Last year, concerns about the high level of debt forced the firm to raise £264m in emergency funding. This proved to be a dismal flop, with corporate brokers having to buy nearly 40% of the issued shares. In March, Kier suffered further embarrassment when it revealed than an accounting error meant that debt was £50m higher than expected. As a result, instead of the debt being cleared, it still has £60m of net debt left.

Why does this matter?

Kier's problems are significant because it employs 20,000 people, and plays a key role in various government infrastructure projects, including High Speed Rail 2, as well as delivering public services, such as refuse collection. Last year another major government contractor, Carillion, was forced to go into liquidation, and there are fears in some quarters that the same could happen to Kier

What's likely to happen?

Kier is unlikely to go bankrupt, at least not immediately, because the underlying business is making a profit, just not as much as expected. In contrast, Carillion was making huge losses by the time it was wound up.

If you think that the worst of the firm's problems are behind it then the firm looks cheap at less than twice estimated 2020 earnings, and at a whopping 60% discount to its liquidation value.

However, the big question after all these revelations is whether there are any other issues that haven't been disclosed. And don't forget: shares tend to do badly after profit warnings.

Recommended

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
Investing in drugmakers: uncommon profits from curing rare diseases
Share tips

Investing in drugmakers: uncommon profits from curing rare diseases

Treatments for medical conditions with only a small number of sufferers can still be very attractive for pharmaceutical companies and investors becaus…
20 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022
How not to get beaten by inflation
Inflation

How not to get beaten by inflation

With inflation at 9%, and the bank rate at 1% you’re not going to get a real return on cash. But there are steps you can take to beat inflation, says …
19 May 2022

Most Popular

Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022