'KITCHEN SINK!': Kier REPORT in the FT

'Kier investors get that sinking feeling as they smell another Carillion'

Editor:  BELOW is a report in the FT published yesterday

and written by Matthew Vincent:

FOR new chief executives, “kitchen sinking” is a business tactic — dishing all the dirt on a company’s falling profit, higher costs and rising debt in one go, in an early trading update. For contractor Kier, kitchen sinking is also a business in itself — fixing domestic plumbing for local authorities, housing associations and private landlords, in one visit, in “responsive repairs”.

In fact, its website features an employee with his hand up a kitchen U-bend. So it was perhaps not surprising that Kier’s chief of seven weeks, Andrew Davies, was also elbow-deep in unpleasantness on Monday: warning that a £40m plunge in profit would mean falling back into debt only months after a £265m fundraising.  Commentators quickly donned the rubber gloves. FT Alphaville called it a “massive kitchen sink profit warning . . . an Olympic sized-bath”. Stifel’s analyst saw it as “a clearing of the decks” if not the draining board. The Independent feared for the crockery: “If he is indulging in kitchen sinking . . . he’s playing a dangerous game”. But it is arguably far worse — because Mr Davies’ sink is so very small. He is only dumping £15m of bad news into it, which is the hit from accelerating his cost-cutting plans. All of the other £25m reduction in profit is from a circa-£250m collapse in revenue from Kier’s day-to-day highway, home maintenance and building operations, which he cannot manipulate with a pair of Marigolds.

If all £40m had been simply kitchen sinking, analysts and shareholders would have not held their noses.  Instead, Liberum downgraded its target share price for the second time in two weeks, from £6 to £4 to £3.20 — and it serves as Kier’s own broker. But investors felt £1.60 was the low water mark, giving the group a market value of only two times its revised earnings. Why? Because, if this is not kitchen sinking, it really stinks. It proves that all of the financial forecasts made at the time of last December’s rights issue — under previous chief Haydn Mursell — were wrong. How else could Kier raise a net £250m of new funds explicitly to strengthen its balance sheet but now warn of a return to net debt by its June 30 year-end? As Brewin Dolphin investment manager John Moore put it: “It has broken trust with investors, which does not bode well.

It also smells horribly like Carillion, the government contractor that collapsed in early 2018, after its debt spiralled as its working capital ran out.  Who would not be concerned when both Liberum and Peel Hunt, Kier’s other corporate broker, estimated a £30m to £40m working capital outflow this year? As Mr Moore added: “Comparisons will be made with the likes of Carillion and, indeed, Kier has lots of complex long-term contracts and individual subsidiaries, which makes for an opaque situation.” Kier is at least less murky than Carillion in three ways. First, it is not reliant on a few huge low-margin construction contracts — it has about 500, and 90 per cent of them are for £10m or less. Second, it is profitable — it will still make £130m this year; Carillion made billion-pound losses. Third, its chief is yet to roll up his sleeves on a new strategy — he will give details on July 30. However, if he cannot cut more costs, and dare not ask investors to back a second rights issue, his strategy will need to be much more straightforward than a kitchen sink U-bend: sell assets to pay down more debt — before investors, or lenders, pull the plug.  Woodford: For Sale sign?

Purplebricks, the struggling online-only estate agent, is trying to persuade reluctant home sellers that they will not have to “do it all themselves”, in TV adverts citing the support it offered to “Sarah and Dom”, “Neil and Glynis” and “Daisy and Chris”. But it seems there is one couple only too happy to arrange a Purplebricks deal entirely on their own: outgoing founders Michael and Kenny Bruce. On Monday, it was revealed that they had sold their respective 11 and 2 per cent stakes directly to Axel Springer, the German media group, which already had a 12.4 per cent shareholding. For Purplebricks’ new management, this DIY deal provides a clean break with the past — and a failed overseas strategy — as well as even more committed backer of digital businesses. For Axel Springer, the DIY deal provides a way to avoid an overhang of stock in the market, and to a send a message that it is doubling its bet on a share price recovery. But for crisis-hit fund manager Neil Woodford, it may provide something even more desperately needed: a buyer for his 29 per cent Purplebricks stake. On the day that the Woodford Equity Income fund had to suspend trading as it scrambles to sell assets and meet redemptions, the Springer deal creates a possible exit. It would now take only one phone call from Springer to Woodford to do a deal for the whole group. If only all estate agent conversations could be so simple.

matthew.vincent@ft.com

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