A building contractor with firm foundations all over the world

The end goal for Neom’s first project, The Line, remains the same: a “vertical city” in the Tabuk region straddled by mirror-clad skyscrapers that will be 170km in length. However, only 2.4km of this is likely to be finished by 2030, the news agency said. 

This means that fewer than 300,000 people will be living at The Line by the end of the decade, as opposed to the 1.5mn that Saudi Arabia’s crown prince envisaged when he launched the scheme two years ago. Neom did not respond to a request for comment.

Over the past 10 years, there’s been a pattern in the kingdom of project delays and cancellations, as well as periods of non-payments to contractors that brought domestic giants like Saudi Binladin Group and Saudi Oger to their knees.

London-based groundworks contractor Keller (KLR) is one of the companies delivering early works packages at Neom. It completed an initial piling works contract worth around £40mn in February last year and then picked up an $80mn (£63mn) contract at Neom’s proposed "futuristic ski resort", Trojena, which is due to complete by the end of this year.

Desert worrier

After an initial wave of enthusiasm, with chief executive Michael Speakman saying in March 2023 that Keller was in “advanced discussions on sizeable packages”, it is quickly becoming clear that Neom may not be the big earner it first seemed.

Keller warned in August 2023 that “an evolution of the design” had delayed further starts at Neom and by October it had begun redeploying resources to other projects in the kingdom.

When full-year results for 2023 were announced last month, Speakman said management was taking “a measured and disciplined approach” in terms of seeking more opportunities at Neom.

Speaking to Investors’ Chronicle on results day, he acknowledged that there were "challenges, both commercial and technical” to operating in Saudi Arabia, but that if more work were to be offered on terms that were similar to the first Neom deal Keller would "go and do it”. “We just have to make sure... that we’re comfortable that we’re operating correctly and with a risk profile that’s acceptable to us,” he explained.

Overall, Keller’s Middle East operations enjoyed a “modest” uplift last year despite a decision to withdraw from the Egyptian market which, along with Kazakhstan and sub-Saharan Africa, was described as being small, non-core and economically uncertain.

The point is that Neom ultimately doesn't matter to the company as much as some may think – or so Keller's biggest shareholder asserts. “I don’t actually factor that into the valuation at all”, said Alex Wright, a fund manager at Fidelity. With project awards slowing and four other contractors circling, there is a risk that a bidding war for new work will erode the margins, Wright argued.

Although a pick-up in Neom awards at the right price would offer potential upside, “I suspect [Keller] won’t deploy the capital there, and I’m very happy with that”, Wright said. “I’d much rather they didn’t deploy to just generate revenue that doesn’t generate profit,” he added.

Fidelity took a stake in Keller in 2019 and has increased its position since then. It now owns about 14 per cent of the company, which it holds in five funds – the largest positions being taken by the Fidelity Special Situations (GB00B88V3X40) fund and the Fidelity Special Values (FSV) investment trust managed by Wright. Since then, the share price has increased by 40 per cent and dividends have continued to climb. 

“It’s already done well but the exciting thing for me is that the valuation is still really, really low,” Wright said, stressing the earnings growth Keller has enjoyed. Over a five-year period that included pandemic disruptions, Keller’s sales have grown at a compound annual rate of 6 per cent and its operating profit has risen at a compound rate of 15 per cent, according to FactSet.

Wright attributes this to a firmer grasp on risk. A series of bad acquisitions in the past led to write-downs and restructurings which almost wiped out profits in 2018 and burdened the company with more debt. This led to a management shake-up, with Speakman moving into the top job in September 2019, a year after joining the company as chief financial officer.

Although things haven’t been perfect since – a fraud in its Australian arm was discovered last year and two underperforming infrastructure contracts in its Nordics business weighed on its performance in Europe – the company has been profitable and cash generative.

Net debt has come down from 1.7-times cash profit in 2018 to 0.8-times at the end of last year. The group’s return on capital employed has also risen from 13.2 per cent to 22.8 per cent – its highest level for 15 years. Last year alone earnings per share jumped by 50 per cent to 154p.

American dream

Many of these improvements stem from Keller's North American arm, where underlying operating profit doubled last year despite a 6 per cent decline in revenue. The region's underlying operating margin jumped from 4.3 per cent to 9.6 per cent.

Some of this uplift is temporary. Suncoast, the group's Houston-based manufacturer of reinforcing steel cables, generated excess profits as it maintained prices even though steel costs fell – a factor not expected to repeat this year.

However, Speakman argued that the bulk of the improvement was more permanent in nature, coming from a step-up in the performance of the foundations business. Five years ago, this was “an amalgam of acquisitions” organised around product lines. A first attempt to change this was stymied by the pandemic, but a reorganisation began in the second half of 2022 that involved standardising operating procedures and reviewing project performance, as well as overhauling management in some units.

Looking ahead, Speakman expects margins in North America to settle at between 7 and 8 per cent, dropping this year “to the top end of that range”. Given that North America accounted for about 60 per cent of group revenue and 90 per cent of operating profit last year, it should continue to drive the group’s outperformance over general contractors, which often operate on a margin of just a percentage point or two.

Liberum analyst Joe Brent said that if Keller achieves a medium-term underlying operating margin of 7 per cent, EPS could rise by a further 25 per cent by 2026 to 193p a share.

This scenario is at the bullish end of the spectrum, though. Scepticism around the company’s ability to repeat last year’s feat means the consensus is that earnings per share will decline by 10 per cent this year to 139p, and that EPS will only rise to 160p in 2026.

Even on this more conservative view, however, Keller’s shares look underpriced. After rising by 57 per cent over the past 12 months, they trade at 7.5-times the FactSet consensus forecast, below their five-year average of 8-times and a broader industry ranking of 10-times. They offer a dividend yield of over 4 per cent, and Keller has a track record of uninterrupted payouts stretching back to its stock market debut in 1994.

The company expects “another year of underlying progress” in 2024 and, under Speakman, Keller is not  known for being overly bullish. Earnings in each of the five years so far have either fallen in line with, or ahead of, management guidance, according to Brent.

If the company continues to show signs of momentum, brokers will have to reassess their views and upgrade their targets. With research firm GlobalData forecasting an average annual growth rate for the US construction sector of 4 per cent through to 2028, the fact that Keller is more reliant on activity in the deserts around Texas than Tabuk should certainly help.