LON:KIE | Kier - Acquisition & Possible Dividend Cut?

28th Apr '15 by Damian Cannon

8 comments 8440 reads

I guess that Kier might be a little on the titchy side for some (at £900m market cap) but I've got it in my portfolio as a valid high-yielder (currently 4.4%).

The board do, however, quite enjoy making acquisitions and today's announcement (investegate) of a Mouchel takeover is a doozy for a couple of reasons:

1) I'm going to have to find some cash to finance the heavily dilutive rights issue (5 new shares for every 7 existing)

2) The rights shares are priced at 858p and that's some discount to the current price of 1630p

3) The dividend is going to be rebased to account for all of these new shares:

The Board intends to continue with its progressive dividend policy. The final dividend in respect of the financial year ending 30 June 2015 will be adjusted to take account of the increased number of Shares that will be in issue following completion of the Rights Issue.

So my rough calculation on this is:

Now: 55,527,580 shares with a dividend of 72p = £39,979,857 paid out

After: 95,174,272 shares taking a pay out of £39,979,857 = 42p dividend

At a theoretical ex-rights share price of 1305p (due to the new shares being sold cheaply) this implies a yield of 3.2%.

OK this is perhaps a worst-case scenario but it's a bit of a drop in yield (but not income assuming that I take up my rights and put more money into the holding - except that it would then become overweight). On the other hand there's not much choice in the Construction & Engineering sector - apart from Carillion every other company is either too small or too low-yielding.

Thoughts anyone? Is it worth keeping in the high-yield part of my portfolio? Is the discount too much or is it a buying opportunity? Is Mouchel worth buying in the first place?

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Rusty2

21st May '15

How about BALFOUR BEATTY, div. is 5.5%?

Damian Cannon

Surely not? Didn't they cut the dividend last year - and what a car crash of a company anyway!

No my favourite in this sector is Carillion (LON:CLLN) - a solid and dependable player so far...

Cisk

22nd May '15

Mouchel was always a dogs dinner, from memory the board overstated profits and it went bust, leaving shareholders with nothing, and I'm sure the banks made a nice turn of cash for their troubles. I don't know much about Kier but it would scare me having such a huge rights issue to buy a ropey business.

In the past I've had Balfour Beatty, ROK (since bust) and I think one other that-sort-of-company.
Lessons learnt from it: The long-term framework contracts are such low margin, and if the company gets its sums wrong by a fraction, they'll end up losing money. And they always tie up a huge amount of capital and require lots of funding.

I'd rather supply the materials rather than do the building; hence why Breedon Aggregates (LON:BREE), Travis Perkins (LON:TPK), Headlam (LON:HEAD) interest me much more.

Obviously each to their own, I've just been burnt too many times in that sector - by apparently sound companies - that I would never touch it again. Although Babcock International (LON:BAB) has been a sound investment - that's now my only exposure.

jjis

Hi Damian,
With regards to the rights you say taking up your rights would make you over weight although you do not make clear if this is versus your ideal stock position or the sector. To avoid this (if you wanted to keep Kier) you can just let the rights lapse and they then send you the cash for the proceeds, or sell some of your rights to take up the balance which may not then leave you overweight your target?

On the deal I think CISK is probably right in his description of Mouchel, but may be therein lies the opportunity? Not that keen on construction companies with their low margins a propensity for big write offs if contracts go wrong and dividend cuts when there's a recession.

But if you wanted to maintain exposure to this area you could look at Galliford Try (LON:GFRD) Galliford Try which offers better VQ&M and therefore a higher stock rank than Kier. I note it also Scores quite well in Compound Income Scores which are designed to highlight potentially attractive income / growth yield stocks which I believe you are familiar with and they have been updated today if you wanted to look for other alternatives for further research.

Cheers - hope this helps?

Regards

Jamie

Compoundincome.org

Hi Jamie,

Thanks for the suggestion of Galliford Try (LON:GFRD). Quickly looking over the numbers it ticks an awful lot of the items on my checklist and places highly on all of the StockRanks. The only immediate thing that bothers me is the substantial rise in share count over the last 5 years - but there may be a simple explanation. Definitely worth further research.

But you're right about the sector in general suffering from low margins and instability. That's why I actually sold Kier (LON:KIE) as I just didn't fancy adding any more uncertainty! Still it was nice while it lasted.

Finally with my positions I'm simply looking at the average position size across all holdings without regard to sector. On the whole I seek to keep positions more or less in line, to minimise the impact of failures, but I'm not too strict about it!

Cheers,

Damian

Galliford Try is a housebuilder which is different from companies like Kier, Carillion, Costain. Housebuilders have done very well lately not sure how much longer that will continue, my best share is Inland Homes but I would not buy it now.

Whitbourne

Hi Damian,

I'm in exactly the same position as you as regards weighting of the portfolio. The rights issue caused me to reconsider my investment in Kier (LON:KIE) and so rather than take up the rights, or letting them lapse and take the cash, I decided to switch my holding to Carillion (LON:CLLN). Three reasons:

1. Research suggests that takeovers tend to enhance value for the target company's shareholders and are neutral at best for those of the acquiring company. I don't have the expertise to research this particular deal, but generally I would much prefer management to focus on organic growth.
2. Carillion offers a higher yield with marginally better dividend cover (though still too low for comfort, I normally aim for 2 or better) which fits my objectives.
3. Personal experience of Kier - poor management of a big construction project at my daughter's school, delivered many months late no doubt with hefty penalties. Experience of Carillion - in another context, I'm involved with corporate responsibility. Carillion is probably the leading company in this area in the UK construction sector, certainly among the top 3. I believe that while CR doesn't directly lead to profitability, it's a good indicator of a management team that thinks about the long-term sustainability of the business. That's the sort of company I want to be invested in.

For those who follow these things, Kier has a marginally higher StockRankTM (72 vs. 68) but Carilion scores higher for value (90 vs. 69 for Kier) which suits me fine.

Hi Whitbourne,

It seems that your thought process has very much mirrored mine - although I already held Carillion (LON:CLLN) and so have redeployed my proceeds from Kier (LON:KIE) elsewhere. I agree that acquisitions can be a bit of a poisoned chalice (at the very least diverting a chunk of management time and useful funds) even though they seem very popular at the moment. Thanks also for the scuttlebutt comparison of the two companies; all information is useful.

Damian

Kier - Acquisition & possible dividend cut?

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Damian Cannon

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