It is not quite “The Good, the Bad and the Ugly” but Barclays has initiated coverage of three UK construction contractors with very different viewpoints.
Keller Group PLC (LON:KLR) is the golden child of the group, with Barclays starting coverage with an ‘overweight’ recommendation even though it expects investors overall to remain cautious on UK contractors, “given the volatile track record and perceived risk”.
READ: Keller Group tipped to rise more than 50%
In Barclays’ view, the current valuation of Keller fails to fully reflect the longer term opportunities for the group, “with the market valuation in line with asset hire peers (and strongly underpinned by the value of its equipment) rather than reflecting the group's positioning as a specialist engineering business with leading global market share and as the leading consolidator in its markets”.
The shares currently trade at 1,064p, which is around 8.8 times the group’s earnings per share for 2017; Barclays has a target price of 1,400p for the stock.
Turnaround play Balfour Beatty PLC (LON:BBY) is accorded an “equal weight” rating, with Barclays saying the turnaround has been well executed since 2015 but this is reflected in the price.
The Aberdeen Western Peripheral Road project has been a considerable millstone around the company’s neck but despite the collapse of its joint venture partner, Carillion, the project should be off the books this summer.
Completion of this and other problem contracts should see Balfour Beatty begin to deliver industry standard margins in the second half of the year. This may provide insight into the level of progress made by management.
“We do, however, believe that headline valuation requires significant adjustment to account for the infrastructure investments business (directors' valuation currently 60% of market cap) and for the underlying leverage of the group. On this adjusted basis the contracting business trades at a full valuation, in our view, even on recovered 2019E margins,” Barclays said.
READ: Balfour Beatty trading in line with expectations as restructuring makes progress
Balfour Beatty currently trades at around 303p, down 2.6%. Barclays has a price target of 310p.
The ugly duckling of the group is Kier Group PLC (LON:KIE), which was down 5.1% today at 1,026p, despite the company announcing a joint venture with Homes England and CKH Developments to develop around 5,400 homes in the UK over the next ten years.
Barclays says the broker consensus is “1005 overweight” but it takes a contrary view, kicking off coverage with an ‘underweight’ rating and a 995p price target, based on a sum of the parts valuation.
The bank raises a number of red flags, including significant acquisitions, weighted capital outflows in the first half of the year, heavy use in the past of exceptional items in the profit & loss account, on- and off-balance-sheet leverage, increasing reliance on joint ventures (JVs), not to mention a forthcoming divisional restructuring.
READ: Kier doesn’t expect Carillion’s collapse to affect its own business
On top of the concerns about the whole sector, Barclays thinks it would be understandable were investors to be cautious about the stock.
“While we appreciate a number of Kier's attractions - with a strong position within the Highways market, which should see increased spend in the forecast period on assumption of control of the Smart Motorways JV and the expected returns that should be generated from the investments made into residential and commercial property development over the past three years - we believe the shares are not as 'cheap' or cash-generative as at first glance, with significant adjustments required to appreciate the full leverage position,” Barclays said.