The market likes today’s full-year results report from Keller Group (LSE: KLR) and the stock is up more than 15% as I write. Should you pile into the groundworks contractor’s shares right now to catch what could be a sustained up-leg in operations and the share price?
The company describes itself as “the world’s largest geotechnical specialist contractor providing a wide portfolio of advanced foundation and ground improvement techniques used across the entire construction sector.” One of the great worries I reckon investors have always had about this one is that it serves a notoriously cyclical industry. And that’s why the valuation has been kept pegged down by the market and the dividend yield has been running well above 6%. Indeed, if an economic slump arrives, earnings, the dividend and the share price could all plunge together.
But cyclical shares offer upside potential too. When things go unexpectedly well, we often see rapid share-price advances, and today’s action suggests that we could be at the start of a sustained up-move with Keller. I wouldn’t buy and hold a cyclical share like this for the long term, but it can be a decent strategy to buy and sell at opportune times to try to capture the big moves.
The report today tells us trading and earnings were in line with revised expectations and the figure for net debt came in “better than consensus,” at just over £286m. Borrowings are running around three times the level of underlying operating profit for 2018, which I think is high for a cyclical firm. If trade does fall off in a general economic slump down the road, the level of debt could be a problem.
Constant currency revenue rose 11% compared to the year before, 6% because of organic growth and 5% following the acquisition in the period of a company called Moretrench in the USA, an area that already delivers around half the firm’s revenue. However, underlying diluted earnings per share declined by 20%.
There’s been some trouble in the enterprise because of “underperforming business units,” and the results show a restructuring charge of just over £61m. The bottom line showed a statutory loss of 13.8m, which compares to a profit of a little over £87m in 2017.
Chief executive Alain Michaels was candid in the report and said the outcome for the year is “deeply unsatisfactory.” But he thinks the firm’s decisive action restructuring four of the business units has been successful. The company closed its heavy foundations business in Singapore and Malaysia, restructured its Waterway business in Australia and downsized its operations in Brazil and Africa because of adverse market conditions.
Looking forward, Michaels said the stable market outlook combines with Keller’s leading position in the industry and its £1bn order book to make the outlook for 2019 positive. The directors underlined their confidence by increasing the total dividend for the year by 5%.
I think the decisive action taken to bear down on underperforming operations could have set the firm up well for the future and I find the big and rising dividend attractive. I’m tempted to take a small position in the shares to see what happens next.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.