Same old Carillion as new warning smashes shares

Rumours of a potential Middle-Eastern buyer for crisis-hit outsourcer Carillion (CLLN) saw shares surge 45% Wednesday and Thursday, hitting a 10-week high at 67.5p yesterday. But it didn’t last long. Reality hit Friday following another profits warning that sunk the stock below 50p briefly.

Carillion revealed a £200 million loss relating to contracts in its support services business along with a £134 million goodwill write-down at its UK and Canadian construction businesses. That adds to the previously announced £845 million of construction contract losses that send shares spiralling downwards in June.

We’re now hear that full-year revenue will be lower than current market expectations, between £4.6 billion and £4.8 billion rather than £4.8-£5 billion previously. This implies full-year underlying pre-tax profit of around £115 million, brokers say, versus consensus of £140 million.

On top of that, “transformation of the business, including a radical change in culture, will take three to five years,” we’re warned.

Full-year average net debt is expected to have increased by £50 million to £825-£850 million. Joe Brent, analyst at Liberum, estimates total debt of around £2 billion. To put this in context, he reckons the enterprise value of the business is £1.6 billion.

Clearly, the sheer weight of the debt makes any takeover, should an offer be forthcoming, difficult. Brent notes also that Carillion’s complex debt structure, which includes a large retail component, also makes any restructuring harder.

Brent also questions margin in support services, which is reportedly 5%. Given write-offs in construction, there is an inevitable question over whether the correct level of prudence has been applied to the support services margin, he explains.

Half-year results to 30 June themselves offered no solace, with underlying pre-tax profit down 40% to £50 million – UBS had estimated £65 million – and a total pre-tax loss of £1.15 billion on flat revenues of £2.5 billion.

Interim chief executive Keith Cochrane says the strategic review, being undertaken by consultancy EY, “has enabled us to get a firm handle on the group’s problems”. A “clear plan to address them” has been implemented, we’re told.

It says the business is being refocused on its core strengths and markets, which are support services, infrastructure and building and has an initial cost reduction target of £75 million by mid-2019. Asset sales of £300 million are more than previously guided, with its healthcare services in Canada and the UK earmarked for disposal.

Elsewhere, the pension deficit is to be reduced by £80 million, with a potential further reduction of £120 million should it agree to increase payments in line with CPI rather than RPI. It also agreed a further £140 million facility with a number of banks.

Cochrane tells us the immediate short-term focus is to get the balance sheet back to a place where it can support Carillion in the future, but reduced profitability won’t help and a restructuring will cost money.

Further, points out Brent, while being selective in its construction contracts will reduce risk, it will also reduce negative working capital. And joint venture partners and creditors who worry about the financial strength of the business may seek to hold onto cash and insist on early payment.

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