Struggling construction firm Kier Group (LSE: KIE) saw its share price take yet another beating on Monday after it announced a further raft of negative news, including a suspension of its dividend for at least the next two years. What’s more, Kier once again seemed to be using the kitchen sink tactic – throwing out all the bad news in one go – in an attempt to limit future damage to its shares.
In addition to the dividend suspension, the company also said it would be cutting 1,200 jobs and selling off/divesting a number of assets to focus on core activities. Add to this the fact that with Neil Woodford as its second largest shareholder, the company has been under increased scrutiny of late, we could be forgiven for struggling to see any upside for the firm.
Batten down the hatches But these latest moves, though perhaps coming later than they should have, can be taken to some extent as a positive. The company is making efforts to cut its costs, and is going to focus on the more promising business areas (particularly given its government contracts) of construction, highways and infrastructure. It is planning to divest itself from the weakening housing and property development sectors, as well as environmental consultancy and facilities management.
This type of consolidation is often a sensible move when a company has over-extended itself. By its own admittance, Kier’s substantial growth efforts and acquisitions (which led to its need to raise capital in what became a failed attempt last year) was done with “insufficient focus to cash generation” – a nice way of saying not making any money!
Too little, too late Though in themselves vaguely positive moves, this recent news does paradoxically offer some negatives to consider, the main one being: why now and not earlier? If the company was struggling so much with debt, why did it maintain its dividend until this point? Bad management perhaps?
We should always beware of companies offering a dividend that looks too good to be true, of course. Chances are the firm is trying to entice investors, which can leave fundamental weaknesses unaddressed. Sometimes the best move is to reinvest profits rather than distributing them. I suspect in the case of Kier, maintaining its share price in the face of spiralling debt was what management had in mind.
Likewise, it is not as though its large debt problems came from nowhere. The company steadily dug itself into the red, but a number of technical accounting manoeuvres in its financial reports (all entirely legal it should be said) obscured its true debt levels. Similar issues were seen at failed contractor Carillion in the run up to its liquidation – not a comparison Kier would want to see.
So, is now the time to buy Kier shares? Personally I don’t think so. The company said its intended restructuring should save it approximately £55m a year from 2021, but in the meantime will cost it about £56m over the next two years to implement. Meanwhile, its high reliance on its government contract, which makes up about 60% of revenues, leaves it in a vulnerable position. Personally I would like to see how effective its new strategy is and what the true costs of restructuring turn out to be, before putting my money in.
Karl has no positions in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019