Not this low since the late 1990s, investors are sniffing around Kier shares Monday, but is this a trap?
Wow, I thought my start to the week was bad! But while I cursed my train operator for another half-hour delay, mid-cap builder Kier Group (LSE:KIE) was preparing for much worse.
And it came at 8am as investors bailed out after a grim profits warning. Within an hour Kier shares had lost 44% of their value, trading at prices not seen since the end of 1998.
The announcement has all the hallmarks of a "kitchen sink" job by new chief executive Andrew Davies, who took over in April following last year's emergency rights issue. Results from his strategic review are expected next month, but there are clearly urgent issues that shareholders need to know about.
We'd already been warned at the half-year results in March that quieter highways, utilities and housing maintenance markets were causing problems. Revenue will also be lower at the building business.
So there'll be no increase in revenue from last year's £4.5 billion when Kier reports results for the year to 30 June in September - analysts had been looking for a £250 million increase. Meanwhile, underlying operating profit will be £25 million lower than expected and the Future Proofing Kier programme will cost an extra £15 million. That wipes £40 million, or 24% off forecasts for underlying operating profit. Look for just £126.4 million, says broker Liberum.
All this means Kier will now report a net debt position, even after the £250 million rights issue in December. Bosses had promised a net cash position at year-end when they launched the cash call. Analysts at Numis, who had been expecting £24 million of net cash at 30 June, now expect £56 million net debt.
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This is another blow for star fund manager Neil Woodford. His Woodford Investment Management owns a 20% stake in Kier, worth around £90 million. At one point this morning that had shrunk to just £51 million. Ouch!
To be fair, Woodford isn't the only professional investor caught out by Kier. Standard Life Investments, M&G and a handful of other well-known funds also own significant stakes.
Brokers like Numis, Peel Hunt, Citigroup, HSBC and Santander will also be wincing after underwriting the rights issue at 409p.
Reaction to today's update has been savage. Analysts have either slashed price targets or put them under review. Some lucky investors might make a turn picking up cheap stock, but Kier has never looked particularly expensive using traditional valuation multiples – the price/earnings (PE) ratio is currently about 3 times.
Absolutely crucial to future proofing Kier, and to rebuilding confidence both in the business and the share price, will be the strategy update in July. We know its remit is to look at "…further simplifying Kier to create a more focused group, the allocation of capital resources across the group and additional steps to improve cash generation and reduce leverage."
Kier certainly has a stronger management team now, and Davies finally gets a chance to revive a struggling business after missing out at Carillion - the company went bust the week before he was due to start!
But there are issues outside of management's control; things like a slowdown in UK construction, infrastructure and residential markets, changes in government policy on outsourcing and infrastructure investment.
That makes buying shares ahead of the strategy review an ultra-high-risk strategy.
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