US worries hit Keller

Keller's (KLR) have fallen over 10 per cent from their peak in July. That’s significant because the ground engineering specialist generates over half of its turnover from North America and sentiment there has been dented by the failure to agree a budget and on worries that political wrangling could lead to a US debt default.

However, the group - which provides such services as piling, earth retention, structural support systems and speciality grouting - has been busy taking steps to expand its geographic spread and so reduce its reliance on US markets. Most recently it bought the geotechnical division of South African engineering and construction company Esorfranki for £31m. Esorfranki Geotechnical is the largest ground engineering business in South Africa and, in the year to February, it generated turnover of £49m - half of which was generated outside of South Africa. Earlier this year it also bought Canada’s largest foundation specialist, North American Piling for £144m.

Moreover, Keller is picking up work elsewhere after securing a contract last month worth around £33m to construct the foundations for a new hospital in Singapore. True, there remains a heavy reliance on US markets but, if the current political deadlock can be resolved without a default, the shares could be set for a bounce.

Investec Securities says…

Buy. Weakness as a result of US uncertainty provides an interesting buying opportunity. We expect to see a continued improvement in margins and - with the shares trading on a multiple of six times 2014's forecast embedded value to cash profits - we are setting a price target of 1,300p. We make no changes to our 2013 pre-tax profit forecast of £68m, giving EPS of 67.6p, but we are increasing our 2014 estimates to £80m of pre-tax profit and EPS of 77.1p - reflecting the positive effects of buying Esorfranki Geotechnical. The acquisition provides significant growth opportunities led by major infrastructure projects throughout the sub-Saharan construction market, where Esorfranki generates nearly half of its revenue.

Liberum Capital says…

Hold. Keller’s South African bolt-on acquisition isn't expected to deliver any material contribution this year - the deal won't complete until the end of November - but we estimate the business will add 3 per cent to 2014's full-year earnings. Assuming a £1m increase in interest costs on debt to fund the acquisition, then we are now forecasting that group EPS for 2014 will be 85p. Having been overbought, worries surrounding the US have driven Keller's shares down in September to a more attractive entry level. On our new estimates, the shares trade on around 11 times 2014's forecast earnings - which no longer looks overly demanding. We retain our 1,050p price target.