Kier Group (KIE) share price: H1 earnings preview

Manchester based engineering business, Kier Group, is on a mission to simplify the business and strengthen its balance sheet.

Looking for numbers ‘above’ expectations

At Kier's trading update in January it told the markets that the Group had performed well in the first half and expects to deliver half-year results slightly above the board's expectations. It said that there was an improvement in site productivity through the period despite Covid-19 restrictions.

Underpinning its progress Kier, said it ‘continues to win new business in its markets on terms and at rates which reflect the bidding discipline and risk management introduced under the Group's Performance Excellence programme’.

Part of the company’s strategy is to win long-tail contracts and, since the end of 2020, it has been awarded places on long-term frameworks worth up to £11 billion, across a number of sectors including, health, education and justice. In addition, several existing frameworks were extended by 12 months.

Further, Kier was awarded an eight-year maintenance contract worth around £200 million with Transport for London, a high profile contract for the business.

Pushing ahead with cost reductions

Part of a strategy to strengthen a balance sheet is to consider costs, and Kier now expects to deliver at least £105 million of annualised cost-savings by the end of financial year 2021 (FY21), through what it calls ‘self-help measures’.

It also told shareholders that it continues to review its cost base to identify additional cost-saving measures.

House building arm to be sold to Foster BidCo

Ahead of the numbers, Kier announced the sale of its housebuilding arm to Foster BidCo, a newly formed company owned by Terra Firma (founder) and Guy Hands (chairman). The price agreed is £110 million in cash for Kier Living. Completion is expected before mid-June after Kier shareholders have a chance to vote on the agreement at a general meeting expected to occur in early May.

Kier Living was established to provide well-priced, low-rise, mixed-tenure suburban family homes through open-market sales. While it said the transaction recognises the strategic value of Kier Living, a sale it is in the best interests of shareholders and other stakeholders as a whole because it will facilitate a material reduction in the group’s net debt, reduce the volatility of the group’s working capital and remove the capital requirement to support land acquisition within Kier Living to maintain its current level of sales completions.

Kier will receive net proceeds of £100 million from the sale. The bulk of this, £75 million will be used to reduce the company’s debt; £10 million will be put into its pension scheme to reduce its deficit; and the remaining £15 million will be retained as cash reserves.

The sale will help Kier’s board to simplify the group and allow it to focus on its core, high-quality, market-leading businesses in infrastructure services, construction and property.

Should markets expect Kier to raise equity?

Having raised £100 million, from the sale of its house building unit, the pressure is clearly off the board to raise more money, but Kier believes it is still in its best interests to come to the market.

To this end it is still widely expected that these interim earnings will either contain details of a full proposal or the outline to move ahead with another raising at some point in the near future.

Trading the interim results

The chart below highlights the travails of the civil engineering sector in general and the specific effects on the share price of Kier Group. The record highs were steered by unprecedented activity for the sector, in driving the construction boom of the pre financial crisis excess. The effects of the slow and painful, but controlled, liquidation of Carillion can clearly to be seen and many believed that Kier was likely to follow a similar fate.

At the time of the collapse of Carillion, Andrew Davies was to be appointed a new chief executive officer (CEO) at the FTSE 100-listed company. As history now tells us, he was then appointed to the Kier board as the new CEO which is where he’s now trying to establish this new base.

The establishment of this new base can be seen in the chart below. Shares have more than doubled from the November 2020 lows and, assuming that the interims live up to expectations, there is the potential for the upward facing trend in price action to continue.

There is clearly an upward line of support, but we already know from the company’s recent trading update that we should expect numbers that will beat prior forecasts. The question is whether this upward impetus can carry on. In other words, will the numbers beat improved expectations

Assuming there is a beat on the already boosted expectations, traders would go long Kier stock. At current levels at £94, a stop-loss would go below the rising line of support at £85 with a price target of the June 2020 highs of £109.

If you think that the uptrend, given an extra boost today with the sale of Kier Living, has already priced in any of the upside, then you would go short with a view to a potential drop to below the support line. A stop for a short trade would be placed above the £100 line of resistance.

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