Keller boosts margins as commodity prices drop

The issue last year for construction companies was protecting profitability. Rising prices of commodities squeezed margins and forced them to pass on costs through price rises. Now that commodities prices are dropping, costs are falling and margins are expanding, the opposite side of this coin is a lot better for Keller's (KLR) business.

In North America, the engineering business saw its revenue drop 3.9 per cent, yet its operating profit still doubled to £65mn. A combination of prices rises, improved operational performance and the falling price of steel expanded the operating margin by four percentage points year on year to 7.5 per cent.

The US business saw volumes drop because of a slowdown in the residential housing market, but as a region, it is far more profitable than Europe. Higher European energy prices and a weaker economic outlook meant margins were just 1.2 per cent and the order book slipped back from £389mn to £306mn.

Investors will be relieved that Europe makes up just 23 per cent of total revenue, while 60 per cent comes from the US and the rest from Asia and the Middle East. The high-margin US order book grew 8 per cent which should be the main growth driver this year. The Asian order book dropped 10 per cent but management is hoping to pick up some more work on Saudi Arabia’s Neom project in the coming year.

Broker Peel Hunt is forecasting EPS to rise to 128p in 2024, giving a cheap-looking price/earnings ratio of 6.5 and a free cash flow yield of 10 per cent. Growth may slow but the exposure to the high-margin US economy is appealing, especially at this price. Stick to Buy.

Last IC View: Buy, 762p, 07 Mar 2023