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Are Kier Group shares investable ahead of its proposed capital raise?


Kier Group (LON:KIE) has had its fair share of difficulties over the past few years. Losses have been all too frequent, with its share price currently trading over 90% lower than it was five years ago. Furthermore, the construction and services company has sought to deliver a major turnaround plan in the midst of Covid-19, which caused significant disruption across its operations.

The firm’s current strategy focuses on simplifying its operations. For example, it confirmed in this week’s half-year results that it has exited non-core businesses and sought to reduce costs where possible. This has resulted in a leaner entity that is on track to deliver £115m in annualised cost savings by the end of the current financial year.

Kier Group’s asset disposals having positive impact on finances

Kier’s asset disposals are also having a positive impact on its financial position. For instance, last week’s sale of its housebuilding business, Kier Living, will raise £110m that will be used to reduce debt levels. In addition, it intends to conduct an equity raise to generate up to £240m in the coming weeks. Together, these moves are expected to aid the company in its medium-term target to have a net cash position that provides greater financial security and flexibility.

Clearly, the company has a mixed track record when it comes to raising money from shareholders. In 2018, only 38% of its rights issue was taken up by investors. Underwriters were forced to pay the remainder, as Brexit concerns seemingly weighed on investor confidence. As such, a smooth capital raise is not a given for any company – especially at a time of significant uncertainty caused by Covid-19 containment measures and their impact on the wider economy.

Kier Group order book stands at £8bn

Despite those challenges, Kier Group has been able to win new contracts in recent months. Its order book currently stands at £8bn, which represents 62% of next year’s forecast sales and provides strong revenue visibility for investors. Over the medium term, Kier Group expects to deliver up to £4.5bn in annual revenue, versus £3.5bn in 2020, as well as a rise in adjusted operating margins to 3.5%, from 2.3% in 2020. It also anticipates that its cash conversion rate will increase to 90%, while dividends amounting to a third of earnings are expected to be paid in the coming years.

Of course, there is significant uncertainty regarding future government spending levels that could have an impact on the company’s financial performance. Indeed, the Office for Budget Responsibility (OBR) forecast in March that government spending from 2023 will be lower than previously forecast to reduce the Covid-19-induced deficit. This could limit the scope for major infrastructure projects and may hamper the construction and services sector’s growth plans to some degree.

Therefore, Kier Group remains a relatively high-risk investment prospect. In the short term, risks such as Covid-19’s effect on its turnaround strategy and its plans to raise capital may cause uncertainty that is reflected in a volatile share price. Over the long run, question marks about the growth potential within its core markets in a post-coronavirus world may weigh on its valuation.

For now, it may be prudent to await further company updates regarding its financial position and operational performance before taking action.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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