Could Keller shares really double after shock plunge

Up as much as 12% in 2018, a profits warning came just as global stockmarkets took a drubbing. Graeme Evans runs through the Keller's recovery potential.

A good example of the current unforgiving mood in stockmarkets was provided today by ground engineering firm Keller, whose shares were sent tumbling as much as 33% on the back of a profits warning relating to its Asia business.

There's no hiding place for any kind of weakness, even when Keller points out that other parts of the business - accounting for more than 80% of revenues and operating profits - are still trading in line with expectations.

This rush for the exit left Keller shares trading below 700p for only the second time since early 2013. At one stage they were as low as 640p. That's an interesting position for a stock that our companies analyst Edmond Jackson recently picked for its potential to be one of the beneficiaries of President Trump's infrastructure spending.

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But clearly investors are edgy about the risks associated with any stock exposed to cyclicality, such as the construction-related work that Keller is involved in.

Tougher trading conditions in Asia, most notably in Malaysia, mean Keller will now make a loss of between £12 million and £15 million from the region in 2018, rather than the small profit previously anticipated.

Jefferies responded by cutting its group profit forecast by 18% to £80.8 million, as well as its 2019 estimate by 5% to £104.7 million. The broker's price target has also come down from 1,426p to 1,357p, based on a price earnings (PE) multiple of 12x.

Source: TradingView (*)      Past performance is not a guide to future performance

Jefferies analyst Anthony Codling said a change in government in Malaysia had left large-scale public sector infrastructure projects in a state of flux.

He added:

"The government is reappraising its spending plans and some contracts have been delayed or postponed; this has negatively impacted the demand and supply balance in the Malaysian construction markets."

In addition, he said Keller's new management teams in the region have been reviewing contract performance, which has reduced profit expectations.

Keller, which is now undertaking a strategic review of the affected businesses, has been in a similar situation as recently as October 2016, when it had to warn about very difficult markets in Asia Pacific.

That was the last time Keller shares stood below 700p, before a bounce back to as high as 1,100p in July this year. Keller is the market leader, with 10,000 employees and more than 6,000 contracts in a global ground engineering market estimated to be worth around US$52 billion.

Its shares have comfortably outperformed the wider construction services sector so far this year. However, just under 50% of Keller's revenues are US based and this is likely to have made investors particularly jittery given current worries about how the Federal Reserve plans to combat rising inflation.

Following today's warning, Investec Securities reduced its 2018 earnings per share forecast by 18% to 8.29p, with 2019 falling 12% to 96.5p.

Analyst Kellie McAvoy said the resulting PE multiples of 11.6x and 10x respectively were broadly in line with the group's 10-year average. The new price target of 1,050p - down from 1,200p - implies a total return of 13%.

The company's earnings are backed by a strong cash flow enabling consistent dividend growth despite hefty capital expenditure. The projected dividend yield for 2018 currently stands at around 3.7%, rising to 4.1% in 2019.

*Horizontal lines on charts represent previous technical support and resistance.