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Keller set to grow

The recent share price fall at ground engineer Keller now looks overdone given the group's growth profile, supported by self-help measures and acquisitions
April 22, 2014

■ Shares have fallen significantly

■ Strong sales in the key US market

■ Acquisitions set to boost growth

IC TIP: Buy at 1030p

Shares in ground engineering specialist Keller Group (KLR) have fallen around 10 per cent in the last month. That reflects investor caution over a rather patchy performance in Europe and a more subdued construction market in Australia. But steps taken to improve risk management, together with better contract selection, means that the Australian operation continues to outperform the broader market there - that's reflected in a near doubling in operating margins last year. Accordingly, the recent share price derating is now looking overdone.

Furthermore, over half of group profits come from the US where housing starts last year reached their highest level since 2007 - that boosted sales and is more than enough to offset a less buoyant private non-residential sector. Activity in Canada is also starting to pick up and the group has expanded its presence through the acquisition of Geo-Foundations, a specialist in geotechnical services in eastern Canada - that complements last’s year’s purchase of North American Piling, based in western Canada. A good deal of self-help has also helped to mitigate the tough trading in continental Europe. Cost controls and efficiency gains, supported by a strong performance in Germany and the UK, saw profits treble and margins more than double last year, which all helped to boost group turnover to a record high.

 

Investec Securities says…

Buy. It's too easy to focus on the swing in earnings for Keller during the course of a cycle, but this ignores cash-flow stability and the solid dividend performance. Indeed, the group’s 10-year average cash conversion rate is an impressive 98 per cent, while the dividend has been increased or maintained every year since flotation in 1994. We also think that management’s operating margin target of 6.5 per cent is relatively conservative and believe that 7.5 per cent is achievable by 2016, implying an EPS of 113p. With the shares down, we see current levels as an attractive entry point. Expect pre-tax profit to rise by 12 per cent in 2014 to £83m, and EPS by 7 per cent to 77p.

 

Numis Securities says…

Add. We expect to see Keller deliver double-digit profits growth boosted by a number of large contracts and further margin growth. Recent acquisitions in Canada will add momentum, as will the purchase of Esorfranki Geotechnical, the largest ground engineering business in South Africa. True, currency-related headwinds and the impact of bad weather on the east coast of the US are issues, but the overall growth momentum should be enough to overcome these. Accordingly, we are increasing our price target to 1,400p and expect pre-tax profit for 2014 of £82.5m, giving EPS of 80.9p, rising to £95m and 93.1p in 2015.