Kier Group: Turnaround play that enjoys support from essential public sector contracts
London-listed Kier Group is a construction company that works on projects of all sizes, complexities and sectors spanning the UK. To recap, Kier has been riddled with debt and other financials concerns caused by Brexit and one reason this stock was picked was for its potential as a turnaround play. Kier performed relatively well among our 10 stock picks with a positive return of 15.3% in six months and significantly outperformed the two benchmark UK indices, the MSCI UK and FTSE 100 which lost 16.6% and 15.7% respectively.
The impact of Covid-19 on Kier over the short term is slightly uncertain as non-essential construction may have to be delayed. The company, however, operates across sectors vital to the country such as key maintenance and repair services to the water, gas, power, telecoms and rail sectors.
Furthermore, many of the services it provides have government support and it is able retain key worker status for employees that carry out these activities. In fact, around 80% of its sites or workplaces continue to operate and the company does not expect much material changes to the current financial year’s performance. Kier has also implemented a cost saving programme in response to the pandemic, which include employees, management and the board of directors taking a salary and fee cut for the financial quarter.
Kier’s 1HFY2020 results ended Dec 31, 2019, showed signs of improvement with the new management team. Compared to 1HFY2019, Kier saw a 3.4% increase in operating profits, while operating margins grew from 2.0% to 2.5%, mainly due to the realisation of significant overhead cost savings for the period. Kier’s net debt of GBP395 million ($686 million) was also in line with expectations, with a reduction of GBP27 million from FY2019. The current order book stands at GBP7.9 billion, with Kier winning orders of roughly GBP1.7 billion from the previous year.
Kier’s turnaround strategy is centred on reducing net debt, better allocation of its capital resources and improving cash generation. Kier will be disposing its non-core residential, environmental services and facilities management businesses, which should improve cash flow over the short term. It will also downsize its property business investments as it is not compatible with Kier’s capital allocation strategy. The turnaround strategy also includes a cost saving programme, which include structural changes such as the removal of a number of layers of management and significant reduction in the central overhead costs. This strategy is expected to result in cost savings of at least GBP65 million by FY2021.
Analysts have a 12-month target price of GDP1.19, which is higher than the current trading price of GBP0.95 for Kier. The target prices range from GBP0.70 to GBP2.00 with three “buy” calls, one “hold call” and one “sell” call. It is important to note that Kier is a turnaround play, but based on how effective the new management is with their turnaround plan, we think the company has potential to show significant turnaround progress after FY2021. As such, our valuation of the stock over the next six months would be upwards of GBP1.00 based on current progress. E