Recession or no recession in the developed world, construction work goes on. Maybe it will be boosted as governments seek the Keynesian route out of the world's economic ills; maybe it won't. Either way, construction services provider Carillion does not seem to be suffering. By the end of June, the Wolverhampton-based group had secured 96 per cent of its targeted revenue for 2011.
In addition, Carillion has lots of so-called 'visibility' - assured future revenues - because at the same time its pipeline of contract opportunities was 25 per cent higher than a year earlier at a record £32bn. True, its UK construction order book had contracted a little, but this was mainly because management had become more choosy about which work to go for. Together with tight cost control, that should help maintain profit margins.
Carillion's aim is to provide a broad range of services that will encourage local authorities and government bodies to outsource more work. So not only does it build roads, it also maintains them, including providing services such as snow clearing and gritting. This integrated approach is paying off because the secured order book on the support services side has risen from £11.7bn last year to £12.2bn despite the tough climate.
| CARILLION | ||||
|---|---|---|---|---|
| ORD PRICE: | 333p | MARKET VALUE: | £1.43bn | |
| TOUCH: | 332-333p | 12-MONTH HIGH: | 411p | LOW: 289p |
| DIVIDEND YIELD: | 5.2% | PE RATIO: | 7 | |
| NET ASSET VALUE: | 230p | NET DEBT: | 9% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 4.44 | 118 | 29.0 | 13.0 |
| 2009 | 4.50 | 136 | 30.5 | 14.6 |
| 2010 | 4.24 | 168 | 36.9 | 15.5 |
| 2011* | 4.38 | 208 | 42.1 | 16.3 |
| 2012* | 4.42 | 228 | 45.1 | 17.3 |
| % change | +1 | +10 | +7 | +6 |
Normal market size: 10,000 Matched bargain trading Beta: 1.1 Numis Securities estimates (profits & earnings not comparable with historic figures) | ||||
To diversify its revenue stream, earlier this year Carillion paid £298m for Eaga, a provider of energy efficiency technology to homes. The acquisition creates the platform for Carillion to become the UK's largest independent energy services provider, as it brings significant cross-selling opportunities between the two groups' existing customers.
Elsewhere, new business has been secured in Canada, most recently a £200m road maintenance contract, and it remains management's aim to double revenues in both Canada and the Middle East to £1bn in each case over the next five years.
The Middle East construction business is on a strong footing, with turnover in the first half up by 40 per cent at £254m and underlying profits ahead by 21 per cent at £18.7m. Operating margins, at 7.4 per cent, were down from 8.5 per cent in the previous first half and management expects them to settle around 6 per cent by 2013 as contracts in the region are now competitively tendered rather than negotiated. However, Carillion claims strong long-term relationships with its customers, and by the end of June had secured 90 per cent of its targeted full-year revenues for the region.
The group also has a number of public-private partnerships in the UK and Canada. Profits from these fell 40 per cent to £8.8m in the first half, although this was mainly a reflection of the previous year's high level of realisations. However, Carillion still has 25 projects on its books worth £144m.
Carillion's business model throws off a lot of cash, which helped to finance the £181m cash element of the Eaga deal; although the takeover meant that December's £120m cash pile had turned into net debt of £94m by June. However, new banking facilities are in place, which give the group access to £753m of debt. Solid cash flow also means the dividend is safe. Even though the projected pay-out for this year is covered 2.5 times by forecast earnings, the shares still provide a nigh-on 5 per cent yield, rising thereafter.
