Carillion secures more work

Operating profit is expected to have grown this year at Carillion (CLLN), although the construction and support services group confirmed in a trading statement this month that turnover is likely to be lower due mainly to a planned downsizing of the UK construction division. Even so, a continued shift towards winning more facilities management work means that operating margins are expected to be up from a year earlier.

In fact, turnover from construction has fallen from 55 per cent of group turnover to 45 per cent in the last three years, as Carillion adjusts for the relentless squeeze on UK infrastructure work. Moreover, support services generates higher profit margins than pure construction work, and management plans to increase the maintenance side of the business to around 70 per cent of group turnover.

Carillion has been particularly active in Canada, picking up highways maintenance contracts worth £525m and acquiring a 49 per cent stake in facilities management and infrastructure services specialist, Bouchier Group. The group has continued to win new business on the UK construction side, too - it recently secured two road schemes with the Highways Agency worth £200m. More support service work includes a £1.5bn eight-year energy services contract with Birmingham council, and the group's pipeline of potential contracts is now above the previously reported £35bn level.

Panmure Gordon says...

Buy. Margin performance remains good and contract momentum is positive. Revenue is up on the support services side and the Public Private Partnership (PPP) division is also performing well. An expansion in its Canadian operations includes spending £24m on a stake in Bouchier, and Carillion has options to acquire the remaining 51 per cent over the next 10 years. Trading on a forward PE ratio of just seven, the shares are trading at a discount to sector rivals and there's a well-covered dividend yielding 5.8 per cent. Expect end-2012 pre-tax profit of £217.5m, giving EPS of 43p.

Peel Hunt says...

Hold. Year-end debt of £115m was slightly ahead of our expectations, but the trading statement suggests that the overall outlook remains little changed. Some questions remain over the sales mix and performance deliverability, but the confirmed order book remains strong at around £18bn. Activity in the Middle East - which generates around 15 per cent of cash profits - has seen some recovery with a new order intake in the second half of £200m. We are forecasting end-2012 pre-tax profit of £209m and EPS of 41.5p - but our pre-tax profit forecast of £208.5m for the following year may be a stretch without meaningful new contracts in support services and the Middle East.