3rd Aug 2015 12:23
LONDON (Alliance News) - Ground engineering company Keller Group PLC on Monday posted a substantial rise in pretax profit for the first half of 2015, flattered by a one-off charge it booked last year not recurring, but it said its revenue fell amid tough market conditions.
FTSE 250-listed Keller, which provides engineering services for ground structures, primarily for construction projects but also for underground structures, said its pretax profit for the first half was GBP23.5 million, significantly higher than the GBP4.9 million it posted a year earlier, when it was hit by a GBP27.6 million one-off charge. Stripping out exceptional items, its pretax profit was up to GBP34.6 million from GBP32.5 million.
The rise in profit was driven by an improved operating margin in the half, which increased to 5.0% from 4.5% and helped to offset a 4% decline in revenue to GBP755.8 million from GBP788.2 million, thanks to a lower contribution from major projects and tough conditions in some key end markets, including Canadian oil sands.
Thanks to the profit rise, however, Keller said it will pay an interim dividend of 8.8 pence, up from 8.4 pence a year earlier.
"While conditions remain challenging in many of the markets in which we operate, the recovery in US construction, the group's largest market, remains robust and broad-based. This, together with the benefits from improvements that the group has implemented, means that the board remains confident that the group's results for the year will be in line with current market expectations," said Keller Chief Executive Alain Michaelis.
Keller shares were up 0.2% to 1,060.00 pence on Monday.
The improved profit performance was driven primarily by strong results in Keller's US arm, its biggest operation, where revenue rose 11% and the group operating margin increased by 130 basis points to 6.8%, helping operating profit to rise by 32%. In the half, the value of total construction spending in the US rose by 6%, with private expenditure on construction up 7% and public construction spending rising 3%.
Keller said it was taking advantage of the improved conditions in the market and said activity levels picked up significantly in the second quarter, following a slow start to 2015 due to poor weather conditions. This is in line with what the company said in its first quarter trading update in May, when it said its results would be more weighted to the second half than normal, in part thanks to the adverse weather in the US.
Case Foundation Co, one of its US businesses, has secured a number of key contracts in the first half, including a significant work programme on the Red Rock Dam on the Des Moines River in Iowa and a large project as part of the USD1.3 billion Capitol Crossing development in the District of Columbia. Hayward Baker, its geotechnical construction engineering business, was stable in the half, while its primarily residential-focused Suncoast business had a solid first half and expects to benefit from the rise in housing starts in the US.
Conditions in Canada, however, continue to be difficult for Keller, with current investment levels in the country's resources sector, particularly oil sands, heavily depleted. As a result, Keller has seen increased competition in commercial and infrastructure construction, which has hit margins. Keller Canada profit and revenue fell in the half and Keller has been cutting costs in the business, and will continue to keep its cost base in focus as the market conditions in Canada evolve.
Revenue in Europe, the Middle East and Africa was down by 2% in the half but Keller's operating profit from the region surged higher, up to GBP7 million from GBP2.7 million, thanks to a huge improvement in margins to 3.3% from 1.3%. The majority of Europe's construction markets continue to be challenging, the company said, with little signs of recovery emerging and competition still intense. In the Middle East and Africa, however, conditions are a little brighter, in particular in South Africa and in its work on a major jetty project in Ghana.
Conditions were much less positive in Keller's Asian operations, where revenue fell 15% and its operating margin declined to 1.2% from 6.4%, helping operating profit to fall to GBP0.6 million from GBP3.6 million.
The fall in revenue was down to the timing of major projects in the region, as the 2014 Sengkang hospital project in Singapore was undertaken in the first half and the group saw delays to the start of work on the expansion of Changi airport, also in Singapore. This fall in revenue from Singapore, along with tough trading conditions across the region, drove the plunge in operating profit, Keller said.
In addition to the Singapore troubles, oil and gas investment in Asia has been dragged down by the depressed oil price, which has traditionally provided Keller with a lot of its most profitable work in the region. In addition, measures by the Singapore government to reduce foreign investment in real estate have hit residential construction activity in the country.
Keller said, however, that its short-term prospects in Asia look better, with a large hospital project underway in Singapore and good contract wins secured by Ansah, the Malaysian piling business it acquired last year. Keller India also had a good half, with results ahead of expectations amid signs of recovery in the market.
Even harder hit than Asia, however, was Keller's operations in Australia, where revenue fell by 44% and operating profit more than halved. The fall is largely due to the end of Keller's work on the Wheatstone liquefied natural gas processing plant in 2014, the largest contract it has ever won. In its first quarter update, Keller had flagged that the end of the Wheatstone project would pulled down revenue.
But beyond this, the construction market in Australia remains challenging, which has put pressure on both revenue and margins for Keller. Major projects in the country are scarce, while commercial and residential construction activity remains sluggish. Keller Australia has been cutting costs to mitigate the weak market conditions and the company said that while there is a significant pipeline of projects being tendered for, the timing of these schemes remains uncertain.
Investec said that while some near-term challenges remain on the horizon for Keller, the results illustrate the recovery in the US construction market and leave the group trading in line with market expectations despite the slow start to the year.
By Sam Unsted; [email protected]; @SamUAtAlliance
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