Share Dilution

Here’s why Kier’s weak stock price makes me want to buy

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It is painful to see an infrastructure and construction contractor Kier Group (LSE: KIE) still down 90% over the past five years. Even the 2021 recovery has stopped boiling and Kier stock price has fallen again in 2022. But I think I see signs of renewed strength and I think Kier stock may be undervalued now .

Kier has had a tough few years with the civil infrastructure sector under severe competitive cost pressures. Then the Covid-19 pandemic didn’t help. From 2018 to 2020, earnings per share fell 90%, causing the stock price to crash. But then profits started to rise again.

For the year to June 2021, Kier saw EPS more than double from a year earlier. Admittedly, the 25p per share was still well below the 2018 figure of 125p. But any return to growth has to start somewhere. So, does it look like it will continue in the current year?

H1 results

Well, we got the first half results on Wednesday. Kier’s stock price fell a few percent in response, but I guess that’s because there were no surprises. I really see it as constant progress, and I like that.

There is no spectacular growth. In fact, revenue actually fell slightly from £1.62 billion to £1.54 billion at the same stage the previous year. But operating margins are improving, rising from 2.9% to 3.5%. And that increased pre-tax profit very nicely from £27.8m to £43m.

Adjusted net earnings per share came in at 7.8p. This is down from 10.4p in December 2020, due to dilution from the recapitalization of Kier. What does this mean on the valuation front? If we double the middle EPS figure as a rough estimate of what the full year might look like, we’d get 15.6p.

Kier share price valuation

On the current stock price, this suggests a price/earnings ratio of just 5.4. However, this can be misleading for a company in debt. And because of that, I like to establish a P/E of enterprise value. This covers what you would have to shell out to buy the whole business and pay off its debt.

On the debt front, Kier has made solid progress. Net debt at December 31, 2021 was £131 million compared to £354 million at December 2020. Due to the nature of the business, debt may vary from month to month. But over the period month-end debt averaged £191m (vs. £436m).

On December’s debt level and today’s Kier stock price, I calculate a P/E enterprise value of 7.1. And using the average end-of-month debt instead, it still comes down to just 7.9. Sounds like an understatement to me, but what’s the downside?

Risk Sector Outlook

On the one hand, companies heavily committed to infrastructure engineering tend to have relatively modest valuations. The highly competitive nature of the business, with its tight operating margins, means that it often doesn’t take too much to plunge a project into loss. It’s a risky business.

On top of that, the outlook for infrastructure projects in the UK is far from rosy. With the effects of the pandemic, escalating fuel costs and the economic fallout from the Russian war in Ukraine, civil engineering budgets could be a little tight for some time.

So yes, there are clearly risks to investing right now. But I still think Kier’s stock price is too low. Kier is on my list of candidates for purchase.

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Alan Oscroft has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.

Motley Fool United Kingdom 2022