Questor share tip: Buy Keller on US construction recovery

The US focused construction group is showing a recovery in US and Australian markets, says Questor

Adjusted pre-tax profits increased by 21pc to £32.5m, on revenue up 22pc to £788.2m, in the six months ended June 30
Adjusted pre-tax profits increased by 21pc to £32.5m, on revenue up 22pc to £788.2m, in the six months ended June 30 Credit: Photo: PA

Keller
889p+14p
Questor says BUY

CONSTRUCTION group Keller [LON:KLR] is enjoying a recovery across all of its markets and Questor thinks the shares are now looking cheap, despite concerns from a legacy contract dispute related to a wine warehouse.

The company, which built the foundations for the London Olympic Stadium, generates the majority of its revenue from foundation work and drilling pilings for buildings.

The trading update detailed a strong recovery in US private construction markets. Keller’s single biggest market is US construction, contributing just under half of the revenue and almost 60pc of operating profits. The US division at Keller showed revenue and profits up by about 25pc.

US sales have continued to improve during the first half, building on the stronger performance in North America during last year. Roy Franklin, chairman, said: “Looking into the second half, we believe that the US construction markets will continue their gradual improvement.”

Shares in the FTSE 250 company gained 1.6pc yesterday after it said that adjusted pre-tax profits increased by 21pc to £32.5m, on revenue up 22pc to £788.2m, in the six months ended June 30.

However, this strong performance was overshadowed by a dispute over a contract the company completed in 2008. Faults were discovered in the flooring at a £40m wine warehouse on which Keller completed the piling work.

In June, contractor VolkerFitzpatrick launched legal action against Keller, claiming that piling errors had caused cracks in the warehouse floor.

Keller denies any wrongdoing but made a provision of £30m in the first half. This resulted in first-half reported pre-tax profits falling to £4.9m, against £17.4m at the same stage last year.

Elsewhere the company’s Australian construction business showed a good recovery. This encouraging performance was largely driven by work on the Wheatstone gas processing plant in Western Australia, which is expected to be completed by September. Operating profits increased by a fifth to £10.6m, on revenue up by 35pc to £144.2m.

The construction group said markets in Germany and Poland delivered good results despite a challenging backdrop in Europe. Keller also achieved its first contract win in the Middle Eastern emirate of Qatar to work on a new metro system. Overall the Europe, Middle East and Africa division reported profits up 50pc to £2.7m, on revenue up 15pc to £214.4m.

As the recovery under way in the US construction industry continues, profit margins could increase further. According to analysis from Liberum Capital, Keller’s operating profit margins are still below the mid-cycle average of 6.3pc. The company is expected to improve its operating profit margins to more than 6pc next year, up from 4.5pc reported in the interim results. However, this would still be about half the group’s peak margins of 11.2pc achieved in 2007.

One of the main attractions for investors in Keller is the steady dividend income that the company offers. The company has an unbroken 29-year record of increasing or, at the very least, maintaining the dividend. Keller raised the interim dividend this year by 5pc to 8.4p per share.

Brokers are now expecting the full-year dividend to increase by 11pc in the current year, to 27p per share, and next year, to 29p, providing a prospective yield of more than 3pc. The dividend looks relatively safe as it is covered three times by earnings.

Keller’s shares have had a tough year, down more than 20pc and are now trading on 11 times forecast adjusted earnings, falling to 9.7 times next year. Both of these forward p/e ratios are in line with the long-run average p/e ratio of 10.

Keller has solid foundations for a recovery. Questor last advised investors to wait until there were signs of a turnaround in the US and Australia (Hold, £11.56, March 13). The share price and dividend now look attractive for the long term. Buy.