Liberum Capital understandably has placed its ‘buy’ rating and 1,400p price target for Kier Group PLC (LON:KIE) ‘under review’ following the sharp share price plunge by the infrastructure firm after it launched a £264mln cash call on Friday.
In late morning trading on Monday, Kier shares were another 5.6% lower at 479.40p, having plunged 22% in value last Friday after launching the 33-for-50 rights issue at a price of 409p a share, which is fully-underwritten. Kier is the City’s most shorted stock.
READ: Kier Group shares plunge as FTSE 250-listed firm taps shareholders for around £264mln via a rights issue
In a note to clients, Liberum’s analysts pointed out that the purpose of the fund-raising is to reduce Kier’s leverage to levels more acceptable to stakeholders, putting the firm in a stronger competitive position and, in time, that could result in higher margins.
They noted that the FTSE 250-listed firm’s management has chosen not to sell its Investment assets, so given that these are valued at £650mln and the group expects to be net cash by June 2019, its balance sheet will be stronger but cash flow will look poor.
As a result, the analysts have reduced their full-diluted earnings per share forecasts for Kier by 33% for 2019 and by 42% for 2020 to 85p and 93p, respectively, on a post-rights basis.
The Liberum analysts noted that the rights price represents a fairly standard 34% discount to the group’s undisturbed theoretical ex-rights price of 752.5p, and expect net proceeds from the cash call to be £250mln.
External environment has changed
They pointed out that Kier’s management indicated that the group’s financial position has not adversely impacted the order book to date, however, they believe that the external environment has changed recently - partly as a result of Brexit - and banks, suppliers, customers and bondsmen all want the firm to have lower leverage.
The analysts said: “This clearly has implications for the rest of the Construction sector, where we see Interserve PLC (LON:IRV) as most vulnerable.”
They added: “Costain, Morgan Sindall and Balfours all have cash on the balance sheet. Keller has a positive working capital model. Mitie, while not a construction company, clearly has a high level of leverage.”