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Fraud a profit drag for Keller

Forensic reports confirm 'no cash leakage' expected from Austral
March 7, 2023
  • £100mn cash outflow triggered by increased working capital
  • Borrowing costs pushed higher

Things had been going well for Keller (KLR).

The groundworks specialist had been extending its footprint into some of the fastest-growing regions of the US and last summer it landed an agreement to work on The Line – a 170km-long ‘linear’ city being built in a Saudi Arabian desert as part of the $500bn (£417mn) Neom project.

And although revenue grew by almost a third last year, losses on contracts in its US foundations business, higher costs and the recently reported fraud in one of its Australian businesses meant its operating profit fell by 11 per cent to £67.8mn.

Thankfully, the impact of the fraud looks to be contained to inflated profits – £7.3mn of which related to the first half of last year, £4.3mn to 2021 and £6.7mn to previous years. An external forensic investigation found there had been “no cash leakage” but the company also wrote down the value of Austral by £7.7mn based on a more sober view of future profitability.

Keller also suffered a largely working capital-related cash outflow of £100mn as receivables growth rapidly outpaced payables and inventories rose following the completion of its buyout of steel rebar specialist Suncoast in the US. Such a big outflow “will not repeat” this year, however, with working capital expected to be largely flat, depending on the scale of the ramp-up at Neom.

This meant net debt grew by around 55 per cent to £299mn, pushing up borrowing costs. Broker Liberum said these would outstrip its forecast profit growth, leading it to trim its earnings per share estimate by 4 per cent for this year and 1 per cent next. Even so, given decent underlying growth the fact that the shares trade at just seven times forecast earnings means we think they remain good value. Buy.

Last IC View: Buy, 752p, 25 Jan 2023

KELLER (KLR)   
ORD PRICE:762pMARKET VALUE:£555mn
TOUCH:759-765p12-MONTH HIGH:875pLOW: 589p
DIVIDEND YIELD:4.9%PE RATIO:12
NET ASSET VALUE:680p*NET DEBT:60%
Year to 31 DecTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20182.228.40-20.635.9
20192.3051.629.735.9
20202.0663.858.935.9
2021 **2.2267.578.135.9
20222.9456.363.337.7
% change+32-17-19+5
Ex-div:01 Jun   
Payment:23 Jun   
*Includes intangible assets of £137mn, or 189p a share. **Restated.