Keller hopes to profit from energy transition

Keller builds foundations for infrastructure, energy and residential projects across the world, which means it is more exposed to the whims of macroeconomic trends than most. Currently, and inevitably, it is inflation that is causing the biggest issues. Revenue was up 36 per cent in the first half of the year, but operating margins slipped 30 basis points because of increasing labour and raw material costs.

When interest rates increase, inflation will slow, which while helpful, will also affect demand. Management expects the US residential single-family home market to slow in the second half of the year as mortgage prices continue to rise. Residential exposure makes up around 20 per cent of revenue.

The good news is around another 20 per cent of revenue comes from energy markets and rising prices means more demand for infrastructure. Keller has won several recent contracts in liquid natural gas projects and expects more activity further down the line. If events in Ukraine do speed a transition away from Russian hydrocarbons – either with more gas or renewables – then it will mean more work for Keller.

The record order book of £1.6bn is up 22 per cent on last year at constant currencies. This figure doesn’t include the £50mn contract from the NEOM project commissioned by Saudi Arabia. Management expects Saudi Arabia could give Keller hundreds of millions of pounds worth of contracts in the coming years. However, the kingdom does have a history of over promising on infrastructure spending when oil prices are high.

Predicting the way macro winds blow at the moment is a difficult game. Broker Peel Hunt is positive though and expects EPS to rise to 112p in 2023, which gives an affordable 2023 PE of 6.9. At that price, the uncertainty is worth the risk. Buy.

Last IC View: Buy, 721p, 08 Mar 2022