Plenty of work for Carillion

Trading conditions remain tough for construction companies, so it is impressive that Wolverhampton-based Carillion has an order book worth £19.7bn - a figure that is little different from a year ago. Only this month, the construction group secured a £1bn order from BT to provide a range of services for the telephone operator's local access network. This is a joint venture from which Carillion will earn £600m over a seven-year period, but, more important, it provides the sort of reliable stream of future revenues that investors just love in these uncertain times. Indeed, at the end of June, 98 per cent of Carillion's targeted revenue for 2009 was either secured or probable.

Another of Carillion's strengths is the diversity of its revenue stream - both its differing sources of income and the many regions from which it derives. Put simply, Carillion makes money from providing services in defence, education, health and facilities management; while, in the Caribbean and Canada, the group's main sources of income include road maintenance and construction.

Support services continue as the group's largest source of income, and this area is currently benefiting from public-sector schemes whose progress has been expedited in order to maintain economic activity in the wake of the credit crunch. For now, this is more than offsetting the effects of a squeeze on private-sector investment and an increase in competition. The group also continues to benefit from significant cost savings associated with its acquisition of Alfred McAlpine in early 2008. These are significant amounts - £15m was saved in 2008, rising to £35m this year and management expects savings to top £50m by 2010.

Carillion has a significant presence in so-called public/private partnerships. The group has a portfolio of 22 financially-closed projects involving an equity investment of £153m. In addition, it is part of a joint venture that is the preferred bidder for a major hospital project in Bristol. Together with a schools project in Rochdale, Carillion expects to put in £42m of equity. Meanwhile, a further eight projects for which the group is shortlisted will take an additional investment of £74m. These investments are significant, because Carillion has continued to achieve an internal target rate of return of 15 per cent over the life of the concession contracts, typically between 25 and 35 years, thereby adding further earnings visibility.

Carillion has also made solid progress in diversifying its revenue stream still further, notably by expanding its business in the middle east. This year, turnover in that region is likely to rise from £464m in 2008 to around £600m. A fall-off in business from Dubai should be more than offset by increased work in Abu Dhabi and Oman. The middle eastern side of the group has an added attraction. For, while group profit margins are running at 2.6 per cent, operating margins from the middle east operations are nearer to 6 per cent.

Outside the middle east, Carillion's bosses have become very choosy about the projects they seek. This is another way of saying they won't pursue low-margin work in an attempt to maintain turnover. Predictably, this has led to a fall-off in business gains. That said, the construction sector as a whole has continued to grow, thanks to the acquisition of Canadian construction group Vanbots, leaving overall revenue in the construction side up by 7 per cent, while maintaining margins at 1.1 per cent. In the UK, recent contract wins include construction work worth nearly £700m on the government's schools-building plans, as well as £116m of work with HM Prison Low Moss in Scotland, and three private sector building contracts worth over £120m.

Carillion's activities also throw off a lot of cash, and net borrowings fell significantly in the first half of 2009, from £227m to £146m in June, helped, in particular by £36m cash generated from the disposal of Carillion IT Services. What's more, management aims to cut the debt further by the end of the year.