Keller Share Blog – Interim Results Year Ending 2019

Keller have now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year as a £77.8M decline in Asia Pacific revenue was more than offset by a £76.7M growth in North American revenue and a £17.7M increase in EMEA revenue.  Depreciation was up £12.5M and other underlying operating costs increased by £15.4M.  Restructuring costs increased by £6.9M but amortisation of acquired intangibles declined by £4.1M and there was a £3.3M income from the contract dispute which gave an operating profit £10.3M lower. Finance costs were up £3.8M and tax charges increased by £7.3M (which included a write off of £10.5M deferred tax assets relating to the Australian tax group after the closure of Waterway) which meant the profit for the period was £3.5M, a decline of £20.9M year on year.

When compared to the end point of last year, total assets increased by £82.2M driven by a £66M growth in property, plant and equipment, a £64.2M increase in receivables, a £4.2M growth in inventories and a £4.1M increase in other assets, partially offset by a £42.5M decrease in cash and a £12.8M decline in deferred tax assets.  Total liabilities also increased during the period due to a £90.9M increase in borrowings.  The end result was a net tangible asset level of £280.6M, a decline of £11.3M over the past six months.

Before movements in working capital, cash profits increased by £1.6M to £82.1M.  There was a cash outflow from working capital but this was less than last time and cash generated from operations was up £8.7M.  The cash income from the contract dispute increased by £3.4M, there was an £8.1M inflow from an asset held for sale, but restructuring cash costs were up £2.1M.  Interest payments were up £2M but tax payments were down £5.7M to give a net cash from operations of £12.5M, an improvement of £21.8M year on year.  The group spent a net £35.1M on property, plant and equipment which meant there was a cash outflow of £20.9M before financing.  The group still spent £17.2M on dividends and paid out £13.5M in finance lease payments so took out a net £10.4M of new borrowings to give a cash flow of £41.3M and a cash level of £61.7M at the period-end.

Overall operating profit was materially lower than last year following the completion of two large projects in EMEA and a weak first half in Australia.  The restructuring programme announced last year was well executed with the Asia Pacific business showing a solid turnaround.  Contract awards at Waterway in Australia have not improved, however, and the decision was taken to cease operations in October.  They reduced capacity in South Africa and Brazil but they remain tough markets and the board continue to manage them closely with further cost reduction actions potentially required in the second half of the year.

The operating profit in the North America division was £33.1M, an increase of £700K year on year although the underlying operating profit fell by 4%. The performance was impacted by unfavourable weather.  The US construction market remains stable.  Residential construction was down but it is highly regional with Texas and Florida remaining buoyant.  Infrastructure is generally strong with a number of large road and rail projects and there are some good opportunities in the industrial sector.  The Canadian market remains regionally mixed.

The overall margin declined year on year driven by the adverse weather related inefficiencies in the period, non-recurring high margin emergency recovery data centre projects as well as a weak first half at Case.  This was offset to some extent by margin improvement at Suncoast where customer pricing has recovered the adverse material cost inflation that was experienced last year.

The North American foundation businesses had a disappointing first half.  Case in particular had a challenging period with negative job mix and adverse weather affecting projects in the Mid West, driving a significant reduction in revenue.  They expect an improved second half based on a stronger order book.  Hayward Baker had a disappointing period achieving revenue growth but at reduced margins, particularly in Q1, although margins have recovered in recent months.  The Moretrench integration continues to perform well and is contributing to their overall business. He other foundation businesses also declined with the Miami market subdued. 

The Canadian business delivered a marginal improvement in performance but it is still not operating at its full potential.  Market opportunities and the order book point to a stronger second half.  Suncoast had a good first half with revenues and margins up.  They have recovered from the steel price induced margin compression of last year.  Moretrench Industrial also performed well and the outlook for both businesses for the full year is positive. 

The operating profit in the EMEA division was £10.6M, a decline of £9.7M when compared to the first half of last year despite a 5% increase in revenue.  The decline in profitability was largely driven by two highly profitable projects in the Caspian ad Middle East which were not repeated this year.  Excluding these two projects, profits were up 4%.

The South East Europe business performed strongly and Germany also performed well and will be busy through 2019.  Elsewhere, Poland was subdued but the UK performed relatively well.  Prelim trial piling work has started on HS2 but the overall HS2 project requires parliamentary approval to proceed.  There are some good projects in North Africa and the French business has won its first large Paris Metro work. 

The Middle East was quiet and has some mixed project performance but they expect the second half to be busier.  Africa and Brazil continue to face tough market conditions despite restructuring actions to reduce capacity so further cost reduction measures may be needed in the second half. 

The operating loss in the Asia Pacific division was £2.5M, a deterioration of £2.1M when compared to the first half of 2018.  Constant currency revenue was down 35% driven partially by market conditions and partially from the capacity reduction actions.  Australian revenue declined 43%.  There was actually a good performance in ASEAN which was more than offset by the weak performance of Australia.

In Asia they took the decision last year to exit heavy foundations activity in Singapore and Malaysia.  This is nearing completion.  The business returned to profit in the period and the cost to complete the restructure was lower than expected.  The refocussing of the business on ground improvement has also enabled them to win a number of significant high quality contracts in recent months totalling more than £40M.  Keller India declined marginally but activity remains strong.

In Australia overall market conditions were soft with two cyclones causing delays in projects in the mining industry.  The level of contract awards has also been unfavourably impacted by the election but tendering activity is now stronger and the second half is expected to return to normal levels.  Waterway reported a £4M operating loss and has been closed.  The board are confident the division will return to profitability in the second half.

During the period the group announced further restructuring activity that will result in the ending of Waterway operations from October 2019 giving rise to a restructuring charge of £11M.  This was offset by a restructuring provision release in Asia Pacific resulting in a net restructuring charge in the region of £6.9M. Acquisition costs of £500K relate to professional fees associated with the wind up of an employee share ownership plan at Moretrench following its acquisition last year.  During the period £3.3M of proceeds were received on final settlement of a contributory claim relating to a contract dispute. 

As a consequence of the restructuring of the Australian business, the group has reviewed the recoverability of the deferred tax assets previously recognised for Australian tax losses and other temporary deductible differences.  On account of the additional risk of non-recovery, the tax charge on non-underlying items includes a valuation allowance of £10.5M made against the full value of the assets previously recognised.

Going forward, the board are confident in the overall health of their markets as reflected by their strong order book.  In the second half they expect to maintain the Q2 momentum in the performance of the North American division, win targeted projects in Australia and continue to deliver on their restructuring programme.  Therefore they expect a stronger H2 with an improvement in margin driving an increase in profit with full year revenue expected to be broadly flat.  Year-end net debt is expected to fall driven by the expected improvement in profit and focus on cash generation.

After the period-end, in July, the group announced that it will start a plan to integrate its seven North American foundations businesses into a single operation.  The costs associated with this are estimated at £2.5M to £4M and will be recognised in the second half of 2019 into 2020.  In the medium term they expect £4.5M to £6M per annum cost and efficiency benefits as well as strengthening market share gains.

After a 5% increase in the interim dividend the shares are yielding 4.2% which increases to 5.2% on next year’s consensus forecast.  At the current share price the shares are trading on a PE ratio of 10.9 which falls to 9.1 on next year’s forecast.  At the period-end the group had a net debt position of £419.6M compared to £286.2M at the year-end.

On the 20th September the group released a trading update.  Full year revenue is still expected to be broadly flat against last year with an improvement in margin driving an increase in profit.  The full year result is more dependent than usual on the timing of expected large contract awards and in the crystalisation of a number of customer claims that are in their final stages of negotiation. 

Trading momentum in North America in the second half has started more slowly than expected and whilst it is now building, there is an increased weighting to Q4.  Trading in EMEA remains mixed with good progress in key continental businesses being matched by challenging market conditions in some of the more peripheral operations.  In Asia Pacific they are on track in winning new targeted contracts in Australia which will ramp up during Q4, with only one material contract on which they have bid to be decided in Q4.  They are delivering well and are slightly ahead of plan with Waterway restructuring.

They expect net debt to reduce year on year and the order book continues to be robust.

On the 19th November the group released a trading update covering the year.  The board expects overall performance to be in line with market expectations, although the outturn remains dependent on the continued progress and timely resolution of a number of customer claims.

As expected, trading in North America has seen increased momentum in Q4.  The reorganisation of the foundations business is on track.  There has been material progress in the negotiations with respect to the scope adjustment to the Bencor contract but it is unlikely to be settled until early 2020.

EMEA trading has been mixed.  There has been good progress in their continental European businesses with strong performances from SE Europe and Central Europe.  Challenging market conditions have continued outside Europe and further restructuring has taken place in Franki Africa following continued disappointing performance during the year.  In Norway, they have been awarded a major contract to complete soil stabilisation and grouting works as part of the SMS3 rail project, valued at approximately £36M.  This is expected to start in November 2019 and completes in 2022.

In Asia Pacific, their expectation of a return to profitability in the second half remains on track.  The restructuring activities and exit from heavy foundations in SE Asia are close to completion and they continue to execute in line with their Waterway restructuring programme in Australia.  Their Austral business has won the final contract it required to underpin its 2019 performance, a major contract to procure and construct the replacement of berthing structures at Rio Tinto’s Cape Lambert Port in Australia.  Work will start in late 2019 and is expected to finish in mid-2021 and is estimated to be worth around £60M. 

Whilst current construction work in their key markets remains robust, the board remain cognisant of increasing global macroeconomic uncertainty.  The order book continues to be robust. 

On the 12th December the group released a trading update.   The board expect their financial performance for 2019 will be in line with market expectations.  The scope adjustment to the Bencor contract has been agreed.  Q4 cash flows have continued strongly.  They have also announced that they will be rationalising their geographic presence and exiting certain non-core services.

They have re-focused their Asia Pacific division which will return to profit in the full year.  In order to concentrate more heavily on their higher quality European business in the EMEA division, they will withdraw from South America where market conditions remain challenging.  They have also started a review of the African activities.  In North America the reorganisation of the foundation business is progressing well and they anticipate generating materially improved financial performance by 2022.

Overall then this has been a tough period for the group.  Profits were down, net assets declined and although the operating cash flow did improve, there was no free cash generation.  There have been a number of issues.  The non-repeat of two lucrative EMEA contracts, a poor performance in Australia, bad weather in the US and difficult markets in Brazil and South Africa have all taken their toll.  The group is returning to profit and is addressing some of these issues, however.  It is early days but the turnaround may be starting here and a forward PE of 9.1 and yield of 5.2% put these shares at pretty good value but the debt levels are a bit of a concern and I would like to see evidence of this coming down before I buy.

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