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?
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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.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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