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Barclays initiates coverage of Keller, Kier, Balfour Beatty
Barclays initiated coverage of three UK contractors on Thursday, saying it expects investors to remain cautious given their volatile track record and perceived risk.
The bank started Balfour Beatty at 'equalweight' with a target price of 310p. It said the company's turnaround, under the 'Build to Last' programme, has been well executed since 2015 with significant progress made, cost out and cash in, and the foundations of the group stabilised.
However, it argued that the headline valuation requires significant adjustment to account for the infrastructure investments business 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. As a result we initiate coverage at equal weight."
Barclays started coverage of Keller Group at 'overweight' with a 1,400p price target, saying the stock's valuation 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".
Finally, the bank started Kier Group at 'underweight' with a 995p price target.
"With a share price down over 25% in the past 12 months and consensus remaining 100% overweight, we seek to assess whether the decline is justified, or more simply a result of wider sector concerns," it said.
The bank argued that significant acquisitions, heavy historical use of exceptionals, meaningful on- and off-balance sheet leverage, increasing utilisation of JVs and a forthcoming divisional restructure inevitably raise some concerns, particularly in light of recent issues in the sector. It said that while it appreciates a number of Kier's attractions the shares are not as cheap or cash-generative as at first glance.