Kier shares surge despite massive losses

Down 12% in early deals, investors saw something they liked in the bashed-up infrastructure group.

Even though Kier (LSE:KIE) is unlikely to lose its "embattled" tag any time soon, today's full-year results offer some hope that the infrastructure group is at least on the road to recovery.

Brave investors have tapped into this potential over recent weeks, with the stock doubling in value since sliding to a 20-year low in the wake of a big profit warning in June.

The "kitchen sink job" undertaken at that time by new chief executive Andrew Davies meant that most of today's full-year nasties were already known, with bottom-line losses of £245 million for the year to June 30 reflecting contract reviews and other exceptionals worth £341 million. Excluding these one-off items, basic earnings per share still halved to 58.2p.

• Kier shares crash 40% to 20-year low

The re-shaping of the group is now well underway, however, with a new management team focused on the creation of a more simplified structure based around its market-leading businesses of regional building, highways, utilities and infrastructure.

Their immediate priority will be to increase cash generation and reduce net debt, which stood at £167 million in today's results and should improve following the suspension of the dividend, as well as cost savings and the impact of December's emergency rights issue.

Source: TradingView Past performance is not a guide to future performance

The planned sale of housebuilder Kier Living will accelerate this process, while cash outflows from today's exceptional items are limited to £32 million over the next seven years.

An order book of £9.4 billion, including £1.1 billion of awards in the second half of last year, also offers some encouragement. Trading conditions, however, are far from helpful with three of the four divisions seeing a reduction in volumes last year. The bright spot was in regional building after a 6% rise in volumes and the addition of new projects worth £1.9 billion.

Analysts at Numis remain optimistic that disposals and a reduction in capital intensive businesses will sustain an improvement in the debt position.

They said:

"Our view remains that Kier is a special situation where substantial recovery potential will be reflected as debt reduces. Full-year results are inevitably convoluted, but are a first step on the road to recovery."

Numis has a price target of 150p, whereas Peel Hunt is at 200p after noting that the new management was "positioned to restore value". Despite this optimism, the broker reduced its 2020 earnings per share forecast by 23% to reflect a rebasing of expectations.

Shares have been among the most shorted on the London stock market, with around 10% still on loan today. They were up 3% at 135.6p after the results but remain at levels last seen in the late 1990s, with the stock currently trading on a forecast price/earnings multiple of 3x.

Kier's demise has been far from helpful for troubled fund manager Neil Woodford, whose Investment Management fund had a 20% stake in Kier. The fall also sharpened the focus on the hefty losses experienced by the underwriters of the poorly-received rights issue in December, when the cash call was priced at 409p a share.