Exclusive: Kier’s finance director has claimed traders will continue to hold short-selling positions in UK’s second-largest contractor until there is certainty over Brexit.
Shorting of Kier’s stock rose from zero in early March to more than 10 per cent after its results for the year to 30 June 2018 were released last month.
The company reported a pre-tax profit of £106.2m but year-end net debt climbed from £110m the previous year to £186m.
The short positions in Kier currently stand at around 9.7 per cent, while last week its share price hit a 52-week low.
Speaking exclusively to Construction News, finance director Bev Dew (pictured) said he did not expect the market’s view of Kier’s stock to change until after the UK exited the EU in March.
He said: “If white smoke appears from Brussels, we all have a soft Brexit and it’s benign, then at that point I think the shorts will reappraise their positions and for the longs, I think that becomes a catalyst for buying what we think is an undervalued stock.”
When companies are shorted, investors expect their share price to decline.
Carillion was targeted by short-sellers from late 2014 and peaked at 25 per cent on 5 July last year, shortly before it reported a writedown of £845m.
Some investors believe the uncertainty around Brexit, and the potential for increased economic headwinds, mean UK companies in cyclical markets such as construction could see their trading and share prices come under pressure.
Mr Dew said these macroeconomic reasons were a significant reason for short-sellers to bet against Kier.
He also cited the repercussions of Carillion’s collapse and Kier’s average net debt as reasons for it being targeted.
The 2018 CN100 found that Kier had increased its gross debt by more than any other contractor compared with the previous year’s analysis.
Mr Dew said the company’s debt was appropriate given the nature of its operations, but added that it could not ignore the view of the market.
“We’re not tone deaf to the market,” the FD said, adding that Kier was now operating in a “post-Carillion world”.
“I’ve got a [capital] structure that I can back [with operations], it works efficiently, I’ve got the support of my banks, but the market sentiment around debt has changed meaningfully since Carillion.”
Kier plans to reduce its average net debt from £375m to £250m by 2021, which Mr Dew said would show the market “we control the debt, the debt doesn’t control us”.
“If we can show the debt is moving down, then the market takes comfort in that,” he added.
Kier is taking a three-pronged approach to achieve this, he explained. “Delivering on our normal business, giving greater clarity in how we’re changing the business with Future Proofing, and generating incremental cash from disposals – all three of those will have a very positive impact on the sentiment around the stock, and that’s been very clear feedback from short and long [shareholders].”
Kier’s peers have not come under the same pressure from short-sellers with the exception of Interserve, which has posted significant losses in recent years.
Galliford Try has an average net debt of £277m versus Kier’s £375m, but Financial Conduct Authority disclosures show there is currently no shorting of its stock.
Their top-10 peers Costain and Morgan Sindall also have no shorting, while Balfour Beatty has a 1.5 per cent short position compared with Kier’s 9.7 per cent.
Mr Dew said Galliford Try’s residential development assets were “more in favour” than Kier’s development assets, which range across light industrial, retail and leisure, hotels, student accommodation and regional office developments.
Galliford Try also raised £158m in a rights issue to cover costs on the AWPR, meaning it did not have to divert cash from its development activities.
“To be fair to Galliford, they’ve addressed their capital issues,” Mr Dew said.
“They had their loss-making project up in Aberdeen and they’ve gone ahead and dealt with that and moved forward with a different shape balance sheet.”
Mr Dew said Kier had not considered a similar approach to pay down its debt while continuing to invest in development assets because the market could be “about to go through a turbulent period in asset valuations”.
“That’s the path we’ve chosen,” he said. “We’ve been very clear with how the debt is moving and you’ve got to back yourself to deliver against that forecast.”
Kier recently secured a place on Cornwall County Council’s £250m building framework.
Kier FD: 'We’ll be shorted until after Brexit'