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Brighter prospects for high-yield Carillion

Carillion has performed well, even though infrastructure spending has not grown as quickly as hoped. However, at some point the cork has to come out of the bottle, and Carillion is well placed to benefit from this. Patient shareholders, meanwhile, are being rewarded with a healthy dividend.
December 18, 2014

Trading has been tough for companies such as Carillion (CLLN), but even though we are entering an election year, when large infrastructure plans tend to be put on hold, 85 per cent of targeted revenue for 2015 has already been secured. That's impressive, but things could get even better when the election hiatus passes. In fact, government plans to boost infrastructure spending should provide Carillion with opportunities to boost its order book still further, and in the meantime there is a handsome dividend yield to enjoy.

IC TIP: Buy at 341p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Attractive dividend yield
  • Very strong order pipeline
  • Earnings visibility of 85 per cent for 2015
  • Operating margins moving higher
Bear points
  • UK construction still to fully recover
  • Green Deal fiasco hits energy services

The pipeline of potential work is already impressive. When the group reports for the 2014 calendar year, confirmed plus probable orders are expected to have risen to £18.5bn, while what the company terms as contract opportunities stand at a mighty £39bn. Strong competition in the industry has inevitably squeezed margins in general, but Carillion has countered this by taking a more selective approach to work taken on. And the results are already starting to show through. Underlying margins in 2009 were down to 3.2 per cent, but by the middle of this year they were up to 5.5 per cent.

 

 

Around half of group profits are generated in the support services division. This covers an array of activities, including energy, rail and road support services as well as consultancy and facilities management. Revenue for the current year is expected to be broadly similar to the previous year, which is impressive given the £70m lost when changes in government policy and legislation prompted termination of a number of energy services contracts. Specifically, Carillion was obliged to restructure its energy services activities as the government's plan to insulate the nation's housing stock failed to gain traction.

There's better news from the group's UK construction operation. This was re-scaled in 2013 to reflect a downturn in construction activity, and that was only achieved by sustaining one-off costs. Trading has started to improve, although it might take until after the general election before there's a significant acceleration. Carillion has also implemented a number of self-help measures which helped the division's first-half operating margins improve from 3.8 per cent to 4.2 per cent.

In the Middle East, construction opportunities continue to improve. While the half-year order book was only marginally ahead at £1bn, the pipeline of contract opportunities increased from £13.1bn last December to £15.7bn. Notable successes included work secured through Carillion's AFC joint venture, which included phase 1 of the Dubai World Trade Centre and phase 4 of the Madinat Jumeirah Resort project that together are worth around £370m to the joint venture.

CARILLION (CLLN)
ORD PRICE:341pMARKET VALUE:£1.47bn
TOUCH:342-342p12M HIGH:395pLOW: 294p
FWD DIVIDEND YIELD:5.4%FWD PE RATIO:10
NET ASSET VALUE:221pNET DEBT:21%

Year to 30 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20115.0520542.316.9
20124.4020040.417.25
20134.1017534.717.5
2014*4.1317433.717.8
2015*4.4918133.918.5
% change+9+4+1+4

Normal market size: 5,000

Matched bargain trading

Beta: 0.88

*Oriel forecasts, adjusted PTP and EPS figures

Carillion has continued with its policy on Public Private Partnerships (PPP) of selling equity investments in mature projects, realising gains and freeing up capital for new deals. And in early December it secured a joint venture worth £190m to finance, design, build and provide facilities for eight schools in the Midlands. Carillion expects to invest around £9m in the project, which is expected to generate revenue of around £190m in its lifetime.

Completing the restructuring of the UK construction division has worked wonders on the group's cash flow, which at the half-year bounced back from £5m in the first half of 2013 to £123.5m. That represents a cash conversion rate from underlying profits of 127 per cent. Net debt at the half-year was down from £271m a year earlier at £204m, and a further reduction is expected, although this doesn't include £37m of debt that came with the acquisition of a stake in the Bouchier Group and a 60 per cent holding in the Rokstad Power Corporation. However, there is plenty of headroom on existing facilities, with available funding of over £1bn.