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KINGSPAN - Role and reputation re the Grenfell Tower fire


April 2021


Share price:- €76.76


Dividend yield: 0.28%


Historical P/E ratio: 37


Kingspan issued a strong trading statement today for the first quarter of the year, which reassured investors. It reported that sales were up 22% (excluding acquisitions) compared to the first quarter of last year. It also reported that it has cash and undrawn credit facilities of over €2 billion, indicating that  the group, with a market capitalisation of almost €14 billion, has ample resources to make more earnings enhancing acquisitions.

Kingspan is among the number of organisations that are attempting to defend their reputations, arising from allegations made during the on-going public enquiry into the reasons why the Grenfell Tower fire tragedy occurred.

Technically, the shares have recaptured the upward trend which was disrupted when news first emerged that it was implicated in Grenfell. The chart (see Irish Shares section) shows that the 150 day simple moving average (sma) has recently turned upwards. Also, the shares went upwards through the 150 day sma, fell back and found support at the 150 day level, and rallied. All of this indicates that the shares have recovered from the recent setback and are once again on an upward trend. Today's trading statement appears to provide further reassurance.

Investment managers running ethical funds have come under pressure from activists to sell any holding in Kingspan, which some have invested in, due to the perceived environmental benefits of its insulation products. At least one fund is known to have sold, and others are considering their position.

Yet, the shares have recovered and have recaptured their upward trend. So has Kingspan weathered the storm?

I have read the phase one report issued by the Grenfell Inquiry, which is available on its website, and also the allegations made against Kingspan together with its responses on normally reliable websites. The final phase two report, which will deal with the wider implications of the tragedy, has not yet been issued and more information is likely to emerge in the coming weeks and months.

However, based on what has emerged to date, Kingspan's defence looks very weak indeed.

Kingspan supplied an insulation product called 'K15' during the refurbishment work on the Grenfell Tower that took place in 2015-2016. Kingspan relied on a safety certification that it had received in 2004 for this product. However, the composition of the product was changed in the interim, without seeking a new safety certification, and this change is reported to have made the product less fire resistant.

That was the first misdeed by Kingspan. The second misdeed occurred when it did its own testing on the product, and this was perfunctory at best. It reportedly tested the outer foil only, rather than the entire product to achieve a better fire resistant performance.

I have set out below the statements from Kingspan that I have read to date, it which it defends itself, together with my comments:-

(i) The main reason why the fire spread was due to the ACM panels in the cladding installed by Arconia, which actually contributed to the blaze instead of counteracting it, per the Inquiry's phase one report.

-- The insulation material, some of which was supplied by Kingspan, was deemed by the Inquiry to be a contributory factor in worsening the fire.

(ii) The refurbishment was not done in accordance with UK building standards, and if Kingspan had known that its K15 product was going to be used on this project, it would not have permitted it.

-- K15 had a falsely high rating of 'Class 0' which is the highest fire resistant rating under UK building standards. Kingspan employees have admitted that a lower rating of 'Class 1' was applicable. The end user was entitled to rely on this 'Class 0' rating.

(iii) The K15 product constituted only 5% of the materials used in the refurbishment project.

-- If there was a higher usage of K15 in the project, it would not have reduced the vulnerability of the building to the blaze spreading.

(iii) The misdeeds in obtaining an unduly high fire resistant rating for K15 and in knowingly selling such a product, were confined to a small number of staff in the UK Insulation division. Management has taken appropriate action by instituting disciplinary proceedings against these employees.

-- Duties may be delegated, but responsibility can not. Management remains responsible for the actions of employees and its culpability will depend on how serious those misdeeds are. Fire resistant certification is, or should be, of fundamental importance for any type of building material.

Despite being a public company, Kingspan is firmly in the grip of the Murtagh family. Together they own approximately 16% of the stock and members of the family occupy the positions of chairman, chief executive and are on the board of directors.

I first recommended Kingspan shares back in the 90's and the stock has appreciated 20 fold since then. But an old maxim in the markets is 'never fall in love with a stock'. Perhaps this is an isolated incidence of poor governance by the Murtagh family, and earnings will continue to grow at a similar rate to that experienced in the past.

Aside from the ethical considerations, which might lead some reading this to avoid the stock anyway,  with good reason - my view, from a financial aspect only is, why bother with the risk of this not being an isolated incident?

The Grenfell cloud will be difficult for Kingspan to shake off, in an environment of ESG (Environment Social & Governance) investing and activism through social media. The Grenfell Inquiry's final phase two report will probably issue next year. While there are other organisations much more exposed to a possible corporate manslaughter case than Kingspan, the loss of its ESG premium rating would deflate the stock significantly.

Therefore, despite the chart showing a clear recovery in the stock, on this occasion my view is that the potentially negative fundamentals make this a stock to now avoid. The recent rally provides a good opportunity for existing holders to sell, or at least reduce exposure.

The Murtagh family is likely to remain in situ and defend itself by disclaiming any knowledge of malpractice on the part of employees.

The 'I earn millions but I don't know what is happening in my company' defence did not work for Bernie Ebbers of Worldcom when he blamed employees for accounting irregularities. He was sentenced to 25 years in jail. And nobody died.

The following is the action I believe that Kingspan should take:-

1. The chief executive and chairman should both resign and new people be appointed.

2. The new management team should bring in a new head of safety who would recruit experienced staff to do a comprehensive review of the certification of all products.

3. The name of the company should be changed, to signify a new regime, and restructured.

4. This restructuring would involve the spin off of the insulation materials division into a separate company, thereby protecting shareholders in the event that further instances of poor governance by the previous management are revealed.

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