Ground engineering specialist Keller (KLR) has come a long way since 2010, the year that saw the worst downturn in the construction sector, when pre-tax profits nosedived 73 per cent to just £17.8m. Problems then stemmed from weakness in US markets, where the group still generates nearly half its revenue, but things have changed for the better since then, and profits last year doubled to £43.5m. True, there is still a way to go to get back to levels achieved in the glory days of 2009 when profits hit £74.7m, but the US market at least is on the mend. And most of the work that has been lost as a result of the financial crash has not gone away; it's simply waiting for a better economic climate.
Profits double in 2012
- US business growing strongly
- Europe, Middle East and Asia first-half losses reversed in second half
- Debt level falling
- Modest dividend
- Premium rating to construction sector
Aside from the US, Keller has three other main divisions - Asia, Australia and EMEA (Europe, the Middle East and Africa). It offers a range of specialist services to clients. These include piling and earth retention, typically employed to transfer foundation loads through weak soils to stronger underlying ground. It also provides speciality grouting - used to control groundwater flow and also to strengthen foundations where, for example, a new road tunnel crosses over an old mine shaft. Other work includes stabilising buildings and embankments and ground preparation for new construction projects, such as the Elm Road power station in the US, which required a water intake system to provide cooling water in excess of 2bn gallons a day.
Keller's strong position in these areas and involvement in the early stages of projects is helping it grow faster than the US construction market. Indeed, while total US construction expenditure grew last year by an impressive 9 per cent, with housing starts attaining levels not seen since 2008, Keller's turnover there grew by 22 per cent. Meanwhile, operating profits rose 167 per cent to £32m and operating margins more than doubled to 5.5 per cent. Crucially, the group's Suncoast residential construction division finally turned the corner and boosted turnover by 35 per cent, which enabled it to report the first full-year profit for five years.
Meanwhile, trading in Australia, which accounts for around a fifth of group turnover and profits, was up despite the loss of a contract following a fall in iron ore prices. A strong contribution from trading in Malaysia helped to lift Asian operating profits by nearly 60 per cent.
| KELLER (KLR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 808p | MARKET VALUE: | £520m | |
| TOUCH: | 806-808p | 12M HIGH: | 835p | LOW: 348p |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 506p | NET DEBT: | 15% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.07 | 17.8 | 44.0 | 22.8 |
| 2011 | 1.15 | 21.9 | 24.8 | 22.8 |
| 2012 | 1.32 | 43.5 | 45.9 | 22.8 |
| 2013* | 1.32 | 50.0 | 51.9 | 23.5 |
| 2014* | 1.37 | 61.0 | 63.5 | 25.1 |
| % change | +4 | +22 | +22 | +7 |
Normal market size: 500 Matched bargain trading Beta: 1.09 *Investec forecasts, underlying figures not comparable with prior periods | ||||
There is also some good news from EMEA, which hit problems in the earlier part of the year, mainly as a result of delays in public works and constraints in the private sector, resulting in a first-half loss of £2.8m. However, reducing costs and making better use of equipment between the various divisions, together with a pick-up in the workload in Poland and London, helped to turn things around in the second half, resulting in a full-year profit of £2.2m. This was well down from £8.4m the previous year, and margins of 2.2 per cent were reduced to a wafer thin 0.6 per cent. However, Keller has recently won its biggest contract in Russia, worth £35m for work on part of a residential complex near Moscow, which follows on from a number of smaller contracts, suggesting business in Russia is starting to gain traction.
Finances remain in good shape, with cash generated almost doubling to £108.4m or 118 per cent of cash profits last year, enabling a reduction in net debt from £102.5m to £51.2m or just 0.6 times cash profits. And, while the forward 2013 PE of 16 is at a premium to the wider construction sector, this looks justified, given the huge backlog of infrastructure work that at some point has to be tackled. And, according to Investec, projected earnings growth is strong enough to put the shares on a more modest 11 times 2015 earnings.
