Smaller companies are notoriously less researched than their larger counterparts. However, in part because of their smaller size, our team has great access to these companies and their management teams. In seeking to exploit this advantage, a core part of our investment process is meeting the companies we invest in.

These meetings then inform our four ‘M’s method for assessing companies. This method looks at a company’s model, money, management and momentum.

Here, we discuss one such meeting recently. We met with senior leaders from a company whose stock we already owned to get an update on how the business is operating.

Case study: Keller

In March we met with the CEO and financial director of Keller. The company is a ground engineering business and has an 8% share of the global market.
Its scale is a reminder of the global nature of some UK smaller companies. It has subdivisions in 37 countries across five continents. This means it can effectively operate in an estimated 200-250 local markets.

We initiated a position in the company in February after meeting with leadership in August 2023. As always, at our most recent March meeting we assessed its progress according to our four M’s methodology.

The company’s model is a standout. Beyond its global reach, the company operates in a technical niche. We believe that general contractors are very unlikely to rotate into the specialised groundwork performed by Keller. This is because this work requires specific skills and equipment – some of the latter is unique to Keller.

Keller has a diversified stream of contracts, particularly in terms of size. This means the business is not dependent on specific areas of the market for revenue. The company has also improved the way it manages contracts and bidding, to improve profitability.

The jewel in Keller’s crown is its US business. It has significant market share, in part because of Keller acquiring other suppliers. In recent years, the company has focused on improving margins in the US, and this has paid off, with margins at around 9.6% in 2023, up from 4.3% in 2022. The region accounts for c. 80% of the business’ profits.

Keller has a relatively new management team. Its CEO joined in 2018 and was promoted to the top job at the end of 2019. Its CFO joined at the end of 2020. Together, they have refined the business’ operations, making it significantly more efficient.

For example, Keller left a number of territories where contracts and margins were less attractive. This has led to a dramatic improvement in financial returns.

On the money side, we note that Keller has improved profitability in recent years. It has significantly reduced its net debt and has cash on its balance sheet. These are markers of a financially healthy company.

Finally, Keller has been experiencing some significant earnings momentum in the last year. This reflects a 25% upgrade to earnings forecasts for 2024 since mid-2023. In our methodology, momentum describes the degree to which we believe there are market factors supporting a share price rise.

Keller has already seen its share price rise over 40% since we first invested, which has benefited The Henderson Smaller Companies Investment Trust. Keller currently represents around 0.8% of the trust’s portfolio.

Glossary

Balance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Share price – EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.

 

Disclaimer

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