December 2018 signified a share price of 409p and yet June 2019 evidenced a crash all the way down to 161p. Is it a case of ‘Kitchen Sinking’? With a new Chief at the helm, Andrew Davies has signified the company’s falling profits, rising debt and higher costs in one swift move. Perhaps he is being more pragmatic in his findings since undertaking the role in March this year, coming in and seeing things in a harsher, realistic light. However, it’s not uncommon for a new boss to portray a dark picture soon after arriving, to then depict themselves as saviours to investors on the precarious path ahead.
Step back to December 2018 and the rights issue offered to investor’s on the understanding that by June 2019 the cash position would be c.£25m. In actual fact, there is a strong claim that the £265m cash raised must have been based on fundamentally wrong financial forecasts as instead there is now a net debt position of c.£56m to be expected.
Of note, there was an anticipated £250m increase in turnover for 2019 from the £4.5bn sales in 2018, yet uncontrollable issues outside of management’s control such as, a slowdown in construction, budget constraints on schools and hospitals have caused turnover to remain stagnant. This culminates with the issues relating to the restructuring costs increasing by £15m, yet there has been discussions this relates to an acceleration of the programme, albeit unavoidable one off costs.
FT advisor Mathew Vincent states, ‘It smells horribly like Carillion’. It cannot be ignored, that certain similarities are evidenced. However, the spread of risk is far less concentrated, whilst the business still remains profitable and there does seem to be a clear strategy being put in place by the new Chief to help cement the company’s market position. Carillion was profitable until the goodwill was omitted from the balance sheet. Moving aside from the accounting gimmickry, Kier has almost £800m goodwill on it’s balance sheet.
Trust with investors has been tarnished and will need to be rebuilt. It is almost unthinkable for the CEO to request a fresh rights issue given the current predicament coupled with the endless paroxysms encountered in the sector currently.
The strategy update in July will be Pivotal to hopefully rebuilding Trust with the market/shareholder’s whilst perhaps focusing more heavily on margin than turnover. Key future requirements of improving cash generation and reducing leverage should not be ignored.
TL Dallas is a leading provider of insurance solutions to protect against insolvency or default exposures. If you would like to talk about specific needs, we would welcome the opportunity to talk to you further. Please email our Credit Insurance team on credit@tldallas.com.