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Keller Group under a cloud after it warns on profits

Trading has been getting tougher in southeast Asia, particularly in Malaysia following the recent change of government and the cancellation of the East Coast rail link
Father and son walking along a railway track
Liberum values Keller on a sum of the parts basis and has a target price of 1,350p

Ground engineering contractor Keller Group PLC (LON:KLR) is to undertake a strategic review after issuing a profit warning this morning.

The company said that it expected its Asia-Pacific unit to make a pre-tax loss of between £12mln and £15mln in 2018, having previously expected to make a small profit.

READ: Keller Group reports solid growth in underlying first-half profits but Numis trims its rating on valuation grounds

The group said that market conditions in southeast Asia, particularly in Malaysia, have deteriorated; the profits downgrade was also occasioned by management taking a closer look at project performance in the southeast Asia and waterway business units.

Broker Liberum Capital Markets suggested the new finance director, Michael Speakman (appointed in August), maybe “applying his own level of caution to guidance”.

In all other respects, the group's trading results for the 2018 financial year remain in line with the board's expectations, Keller said.

The shares lost more than a quarter of their value at 695p.

Liberum stuck with its ‘buy’ recommendation but slashed its price target to 1,350p from 1,500p.

“Market pressures in Malaysia and changing spending patterns have made trading difficult and the change in the Malaysian government has delayed major projects in the region. The East Coast Rail Link has been cancelled. This has put pressure on the supply chain. Renegotiations are focused on price and settlements with customers are becoming more challenging,” Liberum said.

“At Waterways, it is more an element of timing as legacy contracts are taking longer to roll off. Newer, higher margin work is taking longer to come in and the strategic review of businesses has been accelerated,” it added.

Keller hard to manage and accident-prone

Liberum now expects a full-year loss of £13mln for the Asia-Pacific (APAC) division, having previously pencilled in a profit of £1mln.

“We also reduce our FY 19 APAC EBIT [earnings before interest and tax] estimate from a £4.8mln profit to a £5mln loss and we also now expect the division to only break-even in FY 20,” it added.

The broker noted that further restructuring is likely to result in further costs, “which may or may not be taken above the line”.

The profit warning will “do nothing to allay concerns that Keller is hard to manage and accident prone,” the broker suggested.

Russ Mould, the investment director at AJ Bell, mused, “Today, apparently, is not a good day to attempt to bury bad news despite the market volatility".

“Groundworks engineering specialist Keller finds investors in unforgiving mood as it owns up to losses in its Asian business caused by deteriorating conditions, particularly in Malaysia," Mould said.

“Keller is the market leader in countries around the world in ground engineering, which involves providing technically advanced foundation solutions on construction and infrastructure projects.

“This is not the first time operations in Asia have tripped the company up, losses here were largely to blame for a major profit warning two years ago and there may now be questions over whether the company should continue to operate in these markets,” he suggested.

--- adds comment from Russ Mould ---

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Keller Group Timeline

November 06 2017

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