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This is looking like a great stock to be in
Thanks for this Baz. A fantastically detailed account.
PART 2
Another key aspect to the sp dynamic is the very small proportion of available shares. Only 27% of Kier's shares are NOT held by major shareholders. This has enabled much of the volatility in the share price; relatively small trades have moved the share price disproportionately, enabling hedge funds to 'artfully' manipulate the sp down especially in 2019, a significant factor in the sp's low point. Diluting the holdings of the major holders conceivably increases the opportunity for a bid for the entire company. My guess is that the major holders will feel obliged to minimise dilution as much as possible, particularly since Kier has now turned a corner. An investor holding Kier through the last two years of re-structuring is unlikely to meekly give up their holding now that the business is about to reap the rewards. That means that they will take up whatever additional equity is made available, and I'm guessing that this is a key negotiating/directional point with major shareholders, the Kier board and the commercial banks/underwriters for the equity raise. For that reason, I reckon that shareholders will get a good deal in the equity raise AND that it will be massively over-subscribed. We will have the answers soon; we are now more than three weeks into the 'coming weeks' period mentioned by Davies when he discussed the equity raise.
We are also only six-and-a-half weeks away from the year-end. Figures are obviously not available the day after the year-end, but last year Davies rushed out an update the very next day on the state of the business. Since Kier managed a £9m profit at this last half-year with the tail-end of two years of exceptional costs from its restructuring and covid expenses, this next half-year could herald a return to normality and possibly a £40m profit. This would be another positive surprise for the market, which has grown used to Kier disappointments rather than successes, evidenced by the current forecast p/e of approximately 1. Just one year's earnings!! Unusually for Kier, we are in a period of frequent newsflow.
Put a £40m profit together with the sale of Tempsford Hall and £75m starts to alter the equity raise numbers very significantly. Obviously this is just speculation, but Davies and his team have spent two years turning the great Kier ship around; I think it's entirely possible that positive developments will now begin to balance the disappointments of the previous management team's efforts. But even without new positive outcomes, the stage is already set for a massive recovery at Kier. The business remains the largest UK regional construction firm with a formidable order book and a slimmed down profit-focused workforce. Recent moves in the share price are beginning to reflect this.
I found this interesting view published at the weekend on one of the other share forums.
PART1.
Kier is the market leader in construction and has massive momentum compared to smaller operators. Kier's sp will ultimately reflect this. Two loss-making contracts almost wiped out Costain (for example) -- Kier has already handled much worse and has survived. Banks are onside and will continue to be very supportive, regardless of Davies's decision on the equity-raise, imv. The business has clearly turned a corner and lenders are earning safe money from the UK's largest construction firm.
After the equity-raise terms are published, my guess is that the sp will increase by multiples. We have now passed the nadir for Kier's share price and after two years of bad news, I think we will now see many positives coming from the work that Davies's management team has done in positioning the business for recovery, including increasing margin, increasing revenue and cash coming into the business.
A key aspect to the equity raise (apart from reducing debt and finance costs) is making the shares attractive again; it's a key performance target for Davies and he has a large bonus-incentive riding on it. Without the cash-raise, it will take Kier three years to achieve a net cash position assuming profits a little below the low end of Davies's recent forecast -- he forecast profit margin of between 3% and 3.5% on turnover between £4bn to £4.5bn; that's £120m to £157.5m. Without new cash, finance costs will put a dent in those earnings of maybe £15m a year.
But with a cash injection, Kier might achieve net cash in as little as six months. That could bring the prospect of dividends forward by more than two years. Davies has stated an intention to pay dividends of around one third profits, conceivably £40m+ a year. If the market were to rate the share price on a 4% dividend return (as it has done historically), Kier's market cap would be in the region of £1bn (today's market cap is about one sixth of that value at around £160m). If profits are at the higher end; £52m in dividends and a £1.3bn market cap. A p/e ratio for total earnings is around 18 for the sector. At a p/e of just 15 and profits of £140m, Kier would be valued at £2bn, and if the market rates Kier as the sector leader this would push the market cap even higher. The share will increase in multiples of the current share price and I think few people disagree with this. A key factor on the multiples is the level of dilution from the equity raise. If we are ultimately looking at a £2bn company with twice the current number of shares, perhaps we will see the share price increase only 600%!
There is also the potential for more positive surprises; Tempsford Hall had an asking price of around £40m. Regional property has increased in value due to the influence of covid; just £35m from this asset would make a significant dent in the money needed from the equity raise.