Is this the end of Kier?

Having written about my painful experience of investing with Carillion I have watched with interest as shares of Kier have followed a similar route. From a peak of over £24 in 2007, the shares collapsed to £6.50 during the financial crisis, never recovering their previous height and now having lost over 90% of their value at just £1.12. The yield on the shares climbed and climbed before the dividend was suspended earlier this month. The company announced a £250m rights in 2018 (more than the total market capitalisation of the company at the time). Indeed, take-up of the offer was so poor that the company had to offer an enormous discount to current market prices, infuriating current shareholders who accused executives of hanging them out to dry.

Interestingly, a recent statement from the company informed shareholders that “Going forward, Kier will focus on managing its retained businesses to deliver long-term profits and a sustained reduction in the Group’s underlying debt levels rather than targeting lower debt positions at reporting dates”.

This sounds as though Kier has been artificially manipulating their balance sheet to make debt ‘appear’ lower than it actually was. They might have done this by paying off a large chunk of debt shortly before the reporting date, and then reassuming it after the reporting date had passed, or by postponing payments to suppliers until after the deadline in order to avoid taking out loans to make the payments. Either way, an entirely duplicitous method of tricking shareholders into believe debt levels were lower than they were.

I have also read reports that credit insurance for suppliers is being withdrawn and that the company is selling off assets in an attempt to pay down debt (which has also leapt considerably from £100m in 2013 to over 540m in 2018). Add in an ‘accounting error’ and net debt is sat at an eye-watering £180m which is more than the company’s £170m market capitalisation.

All in all, not a pretty sight and I strongly suspect that current shareholders are extremely likely to be totally wiped out as these situations tend to act in a reinforcing spiral. As an investor, the duplicitous management of the balance sheet is more than enough to deter me from investing in the company, but when combined with the calamitous rights issue, I wouldn’t trust senior management in this company if they were the last executives on earth.

As many other commentators have stated, I suspect a lot of this has been caused by Kier’s expansion in the ‘services’ sector and a perpetuation of a ‘buy the job’ culture, where sales teams deliberately bid jobs at a loss and hope to cover their costs through contractual disputes and scope creep down the line. It’s the equivalent of buying a ten pound note for £15 and hoping you’ll find someone stupid enough to buy it off you for £20.

Will the company survive? I suspect some of the units might be bought out by competitors but in the long-run I don’t hold out much hope for this company. Huge debts, tiny margins, and slumping investor confidence (you could almost say non-existent) hardly combine to provide a compelling future outlook for the business. I don’t hold, but if I did, I’d be very, very worried.