Canaccord downgrades Kier as it accounts for rights issue, macro risks

FTSE 250 construction group Kier was under the cosh again on Tuesday as Canaccord Genuity cut its stance on the stock to 'hold' from 'buy' and slashed the price target to 525p from 1,200p to take into account the heavily-discounted rights issue announced last week and macro risks.

Kier said last Friday that it was raising around £250m net of expenses through a 33 for 50 rights issue at a price of 409p per share. The issue price represented a discount of around 34% to the theoretical ex-rights price using the closing price as at 29 November.

In addition, Kier confirmed that current trading and the outlook for FY19 remain in line with the board's expectations but also said that credit markets were difficult.

Canaccord highlighted lower leverage but ongoing risks.

"Clearly the balance sheet improves with a commensurate reduction in financial risk. However, after fees, a worse than previously assumed working capital outflow and confirmation of the average debt level using daily averages, the annualised benefit from the rights issue is arguably only around £90m," the brokerage said,.

Canaccord said that while the cash outflow related to FY2019 dividends reduces significantly to around £25m, the cash outflow related to dividends bounces back to around £60m from FY2020.

"We expect leverage to be below 1 times in FY2020 using average debt, but clearly there remain macro and political risks related to Brexit and working capital outflows potentially being worse than we currently expect cannot be ruled out given the industry and macro backdrop."

It said the new target price was driven by broadly using an adjusted average sector PE and dividend yield based on the group's wider sector peers.

Meanwhile, JPMorgan Cazenove chopped its price target on Kier to 482p from 994p following the rights issue, saying that the £250m of net proceeds will be insufficient to fully assure all stakeholders that Kier's balance sheet is now repaired.

At 1340 GMT, the shares were down 11.7% to 393.80.