VALUE INVESTING
Keller -- How Will the Value Be Outed?

By Stephen Bland (TMFPyad)
January 26, 2001

Yes, it's construction again. This sector has thrown up a large number of value plays in recent times, some of which I have commented on in this series. Note that these shares do not result from combing through the construction sector, but from trawling across the whole market, which is my style: the bottom-up approach. The fact that I have hit on a number of construction shares reflects the fact that this sector is extremely low-rated when compared with the market on any of the usual fundamentals.

Keller (LSE: KLR) (www.keller.co.uk) is not a general construction company or a housebuilder. It is a specialist in ground engineering and structural renovation. Unusually perhaps for a small company with a turnover of around £300m, it is very internationally diversified. At the last full accounts to 30/12/99, only 26% of turnover arose in the UK, with 34% in the Americas and 40% in Europe, Australia and the rest of the world.

Here are the usual fundamentals:

• Share price 167p
• High/low 52 week 270/146
• High/low five years 319/141
• Market cap £94m
• Earnings per share year ended 31/12/99 normalised 21.1p
• EPS lowest recent forecast 31/12/00 19.0p
• EPS lowest recent forecast 31/12/01 20.0p
• Price/Earnings ratio historical 7.9; on 00 forecast 8.8; 01 forecast 8.4
• Yield: historical 4.8%; 00 forecast 5.4%
• Price/Tangible Book 1.9
• Gearing –10% (i.e. net cash) at 31/12/99 – but see below
• One year relative strength -38% (negative)
• Directors own 6.7%, other majors 51.1%

Looking through the interim report to 30/06/00 the company comments that gearing increased to 19% following the acquisition of three businesses.

On the face of it there is not much of an outer here. EPS is set to fall in 2000 with only a marginal recovery forecast for 2001, if analysts' predictions are accepted. Yet this does not quite accord with the directorspeak. For example in November 2000 the company announced that:

"Contracts delayed in the third quarter of 2000 are now scheduled to commence in the first quarter of 2001... there has been an excellent order intake... Keller's order books currently stand at record levels... the company is in a strong position to achieve a good performance in 2001."

Looking at performance over the last few years, Keller increased EPS from 11.7p in 1995 to 21.1p in 1999 without a setback and the share price hit a peak of 319p in 1999 as a result. 2000 EPS is forecast to fall to around 19.0p on the worst estimate and this small fall is what has knocked the share price back to its current level, pushing the P/E and yield into value territory. It is trading only slightly above its five-year low yet EPS is only a little below its five-year high. On the face of it the share price has been hit too hard for what may be only a temporary and modest dip in EPS for 2000.

I have written often that value shares without something to out the value are not very attractive. Cheap fundamentals alone are not enough. There are many examples of shares trading on value fundamentals that never go anywhere because there is no reason for them to rise. That something is usually forecast rising EPS, in the case of trading companies. That something is not present here in any substance, on the face of it. But occasionally, just occasionally, you feel that you need to look beyond the forecasts because some other indicators are telling you a different story. Those other indicators will usually be directors' comments and in this case the 2001 position looks attractive, if we are to believe them.

Where Next?

Keller Group discussion board
Value Investing discussion board