I last wrote about specialist groundworks contractor Keller Group (LSE: KLR) when it released its full-year results in March. Back then I was wary of the cyclicality inherent in the enterprise but owned up to being tempted to buy some of the shares to “see what happens next”, because cyclicality can provide upside surprises as well as risk to the downside, depending on the timing of any investment.
Bumpy trading, but cheap
The Keller share price has wiggled about a bit in the meantime and essentially ended up close to where it was in March. Meanwhile, the valuation continues to look undemanding. The current share price near 636p throws out a forward-looking earnings multiple for 2020 of just over six, and the anticipated dividend yield runs near 6.3%.
There’s no doubt Keller has experienced a few troubles in recent years, and a restructuring programme started in 2018. But that hasn’t stopped the dividend progressing, and it’s up around 50% over the past five years. City analysts following the firm expect steady advances in the payment ahead measured in mid-single-digit percentages.
Yet today’s half-year figures reveal to us that trading started slowly at the beginning of the year, but there was “increased momentum” in the second quarter. Overall in the first half, constant currency revenue declined by 2% compared to the equivalent period the year before, and underlying earnings per share dropped 36%.
By geography, the revenue outcome was driven by growth in North America, Europe, the Middle East and Africa, which was offset by a decline in the Asia Pacific region.
The decline in profits was driven by the completion in 2018 of two large projects in the company’s Europe, Middle East and Africa division. Maybe we can expect new work to rebuild earnings down the road because the order book runs “in excess” of £1bn, and is “particularly strong” in North America. Although that’s offset by a decline in the order book of the restructured Asia Pacific division.
Flat revenue this year, positive outlook beyond
But there are some brighter spots in the numbers too. Net debt eased back by 11% to around £333m because of “an increased focus” on capital expenditure (CapEx) and working capital. The directors slapped another 5% on the interim dividend, thus keeping up the ongoing record of progression.
The company expects trading in the second half of the year to be “stronger”, which should deliver a revenue outcome for the year “broadly flat” compared to 2018. Chief executive Alain Michaelis has a positive view of the future for the company and said in the report “strong” underlying market fundamentals revolve around “ongoing global demand for urbanisation and infrastructure growth.”
I must admit I’m conflicted over this stock right now. If you’re expecting a global economic depression anytime soon you probably wouldn’t touch Keller with a barge pole. But it looks cheap, and if world economies soar away from here into a new era of prosperity, maybe Keller stock will do well.
I remain tempted but haven’t pulled the trigger on the shares yet. However, I do think Keller is too cheap to ignore and could be worth keeping an eye on.
