Shares in construction business Kier (KIE) are under pressure as first half profit comes in short of expectations and net borrowings are higher. The shares are down 4.9% at £10.25.
The market is likely more sensitive about debt due to the recent collapse of Kier’s rival Carillion. Adjusted pre-tax profit is up 5.4% to £48.8m in the six months to 31 December 2017, but this is short of the £51m pencilled in by analysts. Net debt is up by a third to £238.5m as the company invested in its property business.
It is important to keep this indebtedness in perspective, by the year end (30 June) the company expects to report a net debt of less than one times earnings before interest, tax, depreciation and amortisation (EBITDA). The borrowings are also underpinned by property and residential assets worth £500m.
HOW DOES THIS COMPARE WITH CARILLION?
Before its liquidation in January Carillion had a net debt to EBITDA ratio of more than 1.5 times and had lots of hidden liabilities in the form of money owed to suppliers and was also owed significant sums by clients.
Kier’s operating cash flow before movements in working capital represents 125% of operating profit. Working capital outflows did spike in the first half from £28m to £58m year-on-year thanks to lower volumes in the construction business. The company says this should reverse in the second half as work begins on new sites, although it is probably worth investors keeping tabs on this at the full year stage.
Liberum, which has a ‘buy’ recommendation on the stock, comments: ‘Even understanding that the balance sheet and free cash flow are actually better than they look, there are still legitimate questions as to the liquidity of some of the investment assets, and whether management should re-visit its target leverage ratios in the current environment.'
