Boris Johnson is a man for sloganeering and this week it has been ‘build, build, build.’ In a speech in Dudley he reiterated his government’s commitment to a £5 billion infrastructure plan and tolerance of higher levels of debt to achieve this. Here at The Armchair Trader we have been anticipating a return to growth in the construction and house building industries in particular, hence our enthusiasm for Forterra (LSE:FORT).
The market has been less enthusiastic about Kier Group (LSE:KIE), however. Kier shares have fallen from the heady levels of GBX 154 they achieved in February when the market was hoping that, with Brexit largely in the bag, we could sit back and watch the British construction boom happen. While building sites in the UK have been allowed to remain open since the lockdown in March, construction shares have struggled.
Nowhere is this more true than Kier. Kier stock has been stuck around the GBX 80 mark, only recently (4-5 June) starting to claw its way up out of the post-COVID hangover. But traders remain wary of the state of the economy and thereby the health of construction.
Are Kier shares a turnaround play?
Kier is very much in a turnaround situation, the kind of position hedge funds love. The company is now very focused on public works and regulated markets and is trying to sell its house building business (Kier Living), although with little success. The board is mulling a rights issue to help it with £440 million of debt. This is probably its biggest obstacle, as even as the economic picture improves, it needs to do something about that debt.
Before the arrival of the virus, Kier Group had been making some progress and had been reducing debt. The board has told investors that it will be “continuing to implement a range of self help measures” and focusing on operating cashflows. Investors should look out for that equity issue and hope it can find a buyer for Kier Living.
What are the upsides here? Of five analysts following the company, two have it on buy and another on hold. The valuations we are seeing now reflect a high level of pessimism around the company – investors fear Kier could go bust. But it is positioned ahead of what is shaping up to look like a major government spending boom. CEO Andrew Davies himself has already hinted at the fact that Kier is well-positioned to benefit from future government contracts.
Which brings us back to Boris Johnson, and especially to a cool £1 billion earmarked for school construction. That’s before you factor in other potential projects. It currently has an order book of £7.6 billion, of which 60% is ‘government services’. This is not going to go away, and if anything, is going to mushroom.
Kier still needs to get its debt under control, so there is an element of risk here. But from our perspective, it seems very well positioned to benefit from the recovery of the UK economy and aggressive government infrastructure spending.