Plenty of work for Carillion

Carillion is not immune to the harsh economic climate and the certainty of cuts in government spending. But, if there were a template for corporate survival through to better times, the support services group would tick the right boxes.

On one point, let's be clear – government spending is set to fall, not to disappear. And Carillion offers a package of services that should help it win an increasingly large share of what will be a smaller pot; in the process coping with the extra competition that will come its way.

Carillion's success rate so far this year has been impressive. It won £3bn-worth of new orders in the first half, which took its order book from £17.9bn at the end of 2009 to £18.9bn. In addition, there is a pipeline of probable new orders worth a further £1bn. That gives an assured stream of future revenue. So, for example, 98 per cent of projected revenue for 2010 and 75 per cent for 2011 is already in the bag, though that includes an element of probable orders that could be vulnerable to cut-backs. Even so, the size of the order book is re-assuring.

In the first half of 2010 pre-tax profits rose 17 per cent to £58.8m, while profit margins improved from 2.5 per cent to 2.8 per cent. Even after stripping out exceptional items – chiefly £16m profits on selling four investments in public-private partnership (PPP) projects – underlying profits still rose 7 per cent to £65.7m. And cash flow was decent, too. At the operating level it held up at £66m (£53m) and, thanks largely to £31m received from selling the PPP projects, net cash rose from £25m at the end of 2009 to £68m.

Carillion operates through four divisions comprising support services, PPP projects, Middle East construction, and construction services outside the Middle East.

Support services embrace facilities management, which includes industrial estates, rail facilities, road maintenance and utility services. Turnover at the half year was down 13 per cent at £1.12bn, but underlying profits rose marginally to £43.2m, thanks to an improvement in operating margins from 3.4 per cent to 3.9 per cent. Turnover was down because Carillion lost a contract to manage insurance claims for Aviva and it sold some non-core businesses. Still, the order intake was sufficient to boost the order book from £11.1bn to £11.3bn. And the pipeline of potential contract opportunities rose from £5.5bn at the end of 2009 to over £8bn.

Middle East construction saw underlying operating profits fall 38 per cent to £15.4m, although this mainly reflected a gap between project completions and the start of new work. In fact, Carillion's operation established this year in Abu Dhabi, Oman and Qatar is now bidding for its first projects, and the pipeline of contract opportunities has risen from around £4bn at the start of the year to £6bn. The aim is to double sales from the Middle East business within the next three to five years. Construction outside the Middle East saw underlying profits at the half-year move up 11 per cent to £12.1m. Carillion says it has become much more selective about the contracts it accepts, partly to ensure that it has enough construction capability to service the PPP side of its business.

Carillion has a PPP portfolio of 26 projects, four of which were added in the first half, and it is on the shortlist for a further seven in the UK and Canada. And, while there is naturally concern about how spending cuts may affect public-sector work, the UK government has recently confirmed that a number of new projects will proceed as PPPs.