Prior to the coronavirus crisis, acquisitive and growing FTSE SmallCap stock Keller (LSE: KLR) chalked up an impressive multi-year record of advancing shareholder dividends.
Right now, the groundworks contractor displays decent-looking indicators for growth, value and momentum. And this is one of those businesses that hasn’t screeched to a complete halt. Some trading is going on through the pandemic, albeit with plenty of adaptation to protect staff from the effects of the virus.
A FTSE SmallCap leading its field
I’m doing the company a disservice by describing it as a groundworks company because it’s more than that. But I wanted to get you thinking about the right sector. Keller describes itself as “the world’s largest geotechnical specialist contractor,” and it operates globally.
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Today, the company announced the sale of its Brazil operations, which had been on the cards for a while. There was also an update about current trading, which sounds positive overall. I think the outlook is encouraging and see the current weakness in the share price as an opportunity to buy shares in a company leading its field.
Trading for January and February was “marginally above” the directors’ expectations. But there was a “swift” deterioration in activity during the second half of March due to national and regional restrictions on travel and work. However, the performance of the business during March surprised the directors because it wasn’t as bad as they feared. In fact, for the first quarter of the year, the company outperformed last year’s result. And we haven’t heard that from many companies lately!
Naturally, the directors’ have adopted a “broad range” of measures to mitigate the effects of the pandemic on the business and to reduce costs. For example, they’ve cancelled discretionary projects, reduced capital expenditure, and put an “even greater” focus on working capital management. All standard stuff that we are hearing from many companies right now.
Dividend postponed and directors’ haircut
Keller is also using government support on offer across its markets. For example, schemes such as furlough and tax deferrals. But the shareholder dividend has been put on hold because it requires approval at the AGM, which has been postponed. The directors now plan to pay the dividend on 21 August. And in an act that I reckon displays the integrity of the management team, the directors and managers have ‘awarded’ themselves a 20% reduction in fees and salaries “during the second quarter”.
Looking ahead, Keller expects to return to work on most of the contracts being affected by the crisis. Meanwhile, the order book in the near term “remains largely unaffected,” which is great news.
Meanwhile, at the end of March, the company recorded net debt of £251m. This compares to last year’s operating profit of around £74m. And undrawn committed and uncommitted borrowing facilities stood at £238m. The balance sheet also shows cash and equivalents of £87m.
My guess is that Keller has enough financial firepower to survive the duration of the crisis, especially since some trading continues. The directors have abandoned specific forward-looking guidance for the time being. But with the share price at 590p as I write, it remains more than 30% down from its peak in mid-February, despite responding well to today’s update. I’d buy the stock.
