Unveiling the Fair Value of Keller Group plc (LON:KLR)

As investors, we're always on the lookout for companies that offer compelling value. Today, let's take a closer look at Keller Group plc (LON:KLR), a global leader in geotechnical solutions, and explore its fair value. With a market capitalization of approximately £1.2 billion as of December 31, 2020, Keller Group is a significant player in its industry. But what does this market capitalization tell us about the company's fair value, and how does it align with its earnings and cash flow performance?

First, let's consider the company's earnings performance. In 2020, Keller Group reported a profit before tax of £107.1 million and earnings per share (EPS) of 37.5 pence. To compare this with the market capitalization, we can calculate the price-to-earnings (P/E) ratio:

P/E ratio = Market Capitalization / Profit before Tax
P/E ratio = £1,200,000,000 / £107,100,000 = 11.2

This P/E ratio suggests that the market values each pound of Keller's earnings at approximately £11.20. This valuation indicates that investors expect the company's earnings to grow in the future, as the P/E ratio is higher than the average for the construction and engineering sector.

Now, let's examine the company's cash flow performance. In 2020, Keller Group generated operating cash flow of £124.5 million and free cash flow (FCF) of £91.5 million. To compare this with the market capitalization, we can calculate the enterprise value (EV) to FCF ratio:

EV/FCF ratio = Market Capitalization + Net Debt / Free Cash Flow
EV/FCF ratio = (£1,200,000,000 + £110,000,000) / £91,500,000 = 14.2

This EV/FCF ratio suggests that the market values each pound of Keller's free cash flow at approximately £14.20. This valuation indicates that investors expect the company's cash flows to grow in the future, as the EV/FCF ratio is lower than the average for the construction and engineering sector.