Keller reports stellar rise in profits

Given the line of work he’s in, it’s hardly surprising that Keller’s (KLR) chief executive, Michael Speakman, talked about the company’s results setting “a new foundation” for its future performance.

Although revenue growth at the groundworks contractor was unremarkable, increasing by just 1 per cent, a jump in the group's underlying operating margin to 6.1 per cent, from 3.7 per cent a year earlier, meant underlying operating profit rose by two-thirds to £180.9mn. 

This was largely powered by its US arm, which generates around 60 per cent of its sales but more than 90 per cent of operating profit. 

Its underlying margin more than doubled to 9.6 per cent last year, as the company put in measures to standardise procedures. The US arm has been built through acquisitions, which meant there were “different processes and ways of operating” across legacy businesses, and operations weren’t as efficient as they should have been, Speakman said.

It had started to tackle this around five years ago but was halted by Covid, and the recommencement of this work in 2022 was a major factor in last year's improved performance, he added.

Keller's Europe business reported a near-wipeout in profits, due in part to some “self-inflicted wounds” in the Nordic region, but the company said measures had been taken to fix this, and a repeat is not expected.

More encouragingly, given it started last year having just reported a fraud at its Australian arm, that part of the business recorded a significant turnaround. A 37 per cent revenue increase in its AMEA region (and a trebling of operating profit) was led by an Australian unit that “has done tremendously well” given an infrastructure boom in the country, Speakman said. 

Strong free cash flow generation also helped Keller to shave a third off its net debt (excluding leases) to £146.2mn, or 0.6 times cash profit, leaving scope to fund organic growth or small bolt-on deals. Major deals involving competitors seem unlikely. "I'd rather take them on and wipe them out," Speakman said.

Keller’s shares jumped by 7 per cent, bringing their year-to-date gain to 15 per cent. Yet given the significantly higher profit and the upgrades feeding through from brokers – Numis lifted its 2024 earnings per share forecast by 6 per cent to 153.9p – its shares look cheap. They trade at a forward price/earnings ratio of just 6 times and offer a healthy dividend yield of 4.4 per cent. Buy.

Last IC view: Buy, 851p, 1 Aug 2023