It was back in December 2018 that Nigel mentioned ‘ Neil Woodford raising more much-needed cash by dumping good shares’ by selling his stake in Kier Group (KIE), ‘a British construction, services and property group active in building and civil engineering, support services, and the Private Finance Initiative’. I am sure there were a bunch of reasons why Woodford needed the cash at the time, but this decision was not a complete disaster as the shares have fallen by more than 80% since. If only he could have missed all his other big losing calls! I have not been a great fan of Kier Group and related companies for many years, having seen plenty of sector ‘excitement’ over the past twenty-five years. Suffice to say there were a bunch of reasons why in an industry that can easily be impacted by economic volatility and too much debt.
I do agree though that Kier Group is trying to change, having had a capital raising of c. £350 million (at a c. 35% discount to the current share price), together with the sale of Kier Living. And whilst there is always some borrowing in the sector, it is positive to see the company improving to a small net cash position in its results for its year ended 30th June 2021. Unsurprisingly too the mixture of more government spending with COVID-19 reopening meant adjusted operating profit more than doubled to just over £100 million. You can guess the inherent sub x6 EV:EBIT multiple excitement from the average mathematical analyst. Of course investment life is a lot more complicated that a return to a positive net cash level and a modest EV:EBIT multiple though.
First, sales were down by more than 4% driven in particular by revenue declines in the consumer and infrastructure sectors. Spot the impact of exiting ‘low margin or loss making non-core businesses’. At least adjusted operating profits did rise, aided by the year to June 2020 being much more COVID-19 impacted near the end of that period. Meanwhile free cash improved significantly, mostly driven by a c. £100 million improvement in working capital. It was a messy world back in the first three COVID-19 shutdown months, so no surprise to see this improvement. What you are seeing though is that a year to June 2021 analysis of how its numbers got on is far from simple. The same is certainly true for future hopes too. A ‘medium terms target’ can cover anything from the next couple of years to the end of the 2020s. Suffice to say the hopes of Kier Group of ‘organic annual revenue c. £4.0 billion - £4.5 billion’ (equivalent to an increase of more than a third) and higher profit multiples, free cash flow and dividends can sound pretty exciting. And then you can think about a current order book of £7.7 billion split between infrastructure services, HS2 and construction angles. For a company with an EV of under £600 million, that sounds pretty exciting but such is a world of low multiples.
Certainly a target of a move to a c. 3.5% adjusted operating margin multiple is better than the current 3% level (and an equivalent less than half this the year before), but as highlighted by historic sector price volatility, it is easy to be running a loss too. At one level government spending angles is going to matter as you would expect by road highways spending, HS2 excitements and expenditure by the water, energy and telecoms space. And we have even talk about its exposure to ‘10 year school re-building’, ‘new hospital programme to be delivered by 2025’ and justice and defence related angles. It is not an area I am fundamentally normally that excited by, but I do think we are moving closer to a UK economy (and world) of more government spending (and more tax). There are many potential challenges from this, but for Kier Group shares at least there has been less recent high multiple enthusiasm which a slower growth / higher tax world might impact. The share might have doubled year-to-date (post its money raising and related) but I think I might have to accept that at today’s 125p share price it is a BUY. Given my sector avoidance over the last 20+ years, am I confident enough though to buy it myself?! It is a changing / ageing world...
Filed under: Kier Group, Deepverge, Plutus Powergen, Rutherford Health, Fintel, TomWinnifrith.com
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