Keller Group navigates FX impact with strong financial health

Keller Group plc has reported its H1 25 results, raising its interim dividend and launching new share buybacks, despite lower interim profits compared to the same period last year. Despite facing challenges from adverse foreign exchange movements and softer market activity, the company's strong order book and successful share buyback program highlight its resilience. Keller's expertise in geotechnical solutions and strategic growth initiatives continue to drive its robust financial results.

The UK-based Keller Group plc is a leading geotechnical specialist contractor offering a comprehensive range of advanced foundation and ground improvement techniques utilized throughout the construction sector. The company operates across several geographical divisions, including North America, Europe, Asia-Pacific, the Middle East, and Africa. Keller Group's expertise encompasses ground improvement, grouting, deep foundations, earth retention, marine construction, and instrumentation and monitoring.

The company's solutions are designed to enhance bearing capacity, promote low impact and low carbon construction, provide containment, support excavation, stabilize structures, construct marine facilities, control seepage, stabilize slopes, and facilitate monitoring. Specifically, its bearing capacity improvement solutions address settlement control, heave control, heavy foundations, liquefaction mitigation, re-leveling structures, and underpinning. In the marine sector, Keller Group specializes in the design and construction of new ports, jetties, and quays, as well as the extension and restoration of existing marine structures. Keller Group has around 10,000 employees.

Revenue impacted by FX

Keller Group reported revenue of £1,458m in H1 25, down 2.1%. This decrease was primarily driven by adverse foreign exchange movements, which transformed a modest 1% increase in constant-currency revenue into a 2.1% reported decrease. Additional factors contributing to the revenue drop included normalization following exceptionally strong prior periods, reduced project volumes in certain regions, and softer activity in key markets. Despite these challenges, Keller Group posted an EBITDA of £150m for the quarter, reflecting a slight 1% decrease, while maintaining a margin of 10.3%.

Net income also fell to £66.4m, down 4.5% y/y. However, on a positive note, the company's strong order book remained at its previous record level of £1.6bn. Furthermore, Keller successfully completed an initial £25m tranche of its multi-year share buyback program in H1. Looking ahead, the company has announced its intention to launch an additional £25m tranche in H2 25.

Improving gearing

Keller Group reported a solid performance over FY 21-24, posting a revenue CAGR of 10.4%, which reached £3bn, primarily driven by strong growth in its core geotechnical contracting business, performance above market expectations, and robust order books amid steady global demand. EBITDA rose at a CAGR of 32.2% to £196m in FY 24, with margins expanding by 256bp to 6.6%. Net income increased at a CAGR of 36.1% over the same period, reaching £142m in FY 24.

The cash from operations rose from £156m at end-FY 21 to £266m at end-FY 24. Positive earnings trajectory and steady cash inflow from operations led to an increase in cash and cash equivalent rose from £82.7m to £208m. The gearing calculated as total debt-to-equity, improved from 6.2x to 5.6x.

In comparison, Morgan Sindall Group Plc, a local peer, reported a revenue CAGR of 12.3% over the past three years to £4.6bn in FY 24. However, EBITDA also surged at a CAGR of 12.3% to £188m in FY 24, with a margin of 4.1%. Net income rose at a CAGR of 10.4% to £132m.

Positive analyst views

Over the past 12 months, the company's stock has delivered negative returns of approximately 14.9%. In comparison, Morgan Sindall Group’s stock has delivered much higher returns of about 62.2%. In addition, the company paid an annual dividend of £0.5 in FY 24, resulting in a dividend yield of 3.4%. Moreover, analysts expect an average dividend yield of 4.1% over the next three years.

Keller Group is currently trading at a P/E of 6.9x, based on the FY 25 estimated EPS of £1.9, which is lower than its 3-year historical average of 9.2x and that of Morgan Sindall Group (13.9x). In terms of EV/EBITDA multiple of 3.2x, based on the FY 25 estimated EBITDA of £325.6m, which is higher than its 3-year historical average of 3.6x but lower than Morgan Sindall Group ’s valuation of 7.2x.

Keller Group is covered by five analysts, with four having ‘Buy’ ratings and one a ‘Hold’ rating for an average target price of £19.5, implying 44.3% upside potential from its current level. Analysts’ views are further supported by an anticipated EBITDA CAGR of 2.4% over FY 24-27, reaching £345.1m, with a margin of 10.9% in FY 27. In addition, analysts estimate a net profit CAGR of 1.6%, reaching £149.4m with a margin of 4.7% in FY 27, with EPS expected to increase to £2.2 in FY 27 from £1.9 in FY 24. Likewise, analysts estimate EBITDA CAGR of 4.2% and net profit CAGR of 4.1% for Morgan Sindall Group.

Overall, Keller Group has demonstrated resilience and strategic foresight in navigating challenging market conditions and adverse foreign exchange impacts. The company's robust order book and successful share buyback program underscore its strong financial health and commitment to shareholder value. With its extensive expertise in geotechnical solutions and a solid track record of growth, Keller Group is well-positioned to continue delivering strong performance.

However, the company faces several operational risks, including increased costs from supply chain disruptions and inflation, project execution challenges, and regulatory changes. Market competition and economic volatility can compress margins and reduce revenue. External risks include exchange rate fluctuations and geopolitical tensions. Financial risks involve liquidity, funding, and client creditworthiness issues.