Carillion (CLLN) effectively rendered itself ‘Condemned’ in the market’s eyes after it reported the triple whammy of a profit warning, debt problems and the departure of chief executive Richard Howson. The shares plummeted by over a third in early trading. The construction and support services company revised down overall performance expectations, with revenue now expected to be between £4.8bn and £5.0bn. Average net borrowing for the first half is now expected at £695m – higher than the total figure of £586.5m for 2016. Following relatively positive full-year results, Carillion has failed to deliver on its sensible targets set in March – including bringing down full-year average net borrowing through cash generation and better capital allocation. Analysts at Liberum reduced their 2017 EPS estimates by 27 per cent to 25.6p, describing Carillion’s balance sheet as "a mess" that will "continue to overshadow the business".
There were minor glimpses of progress. Carillion’s dominant support services business continued to perform well – comprising around 81 per cent of the total £2.6bn of new work secured during the first half, and with no significant contract renewals until the end of 2019. Carillion also disposed of 50 per cent of its business in Oman, and management expects to derive £125m in total over the coming year from exiting non-core markets. However, this could not distract from an enormous £845m provision cited by the group, caused by "deterioration in cash flows" on certain contracts. This huge exceptional write-off stems from public private partnership (PPP) contracts in the UK (£375m) and from Canada and the Middle East (£470m). For the December year-end, Liberum’s analysts have increased their net debt forecast from £575m (before the trading update) to £800m.
To assuage investors’ fears about cash flow issues and its failure to replace all completed contracts with new ones, Carillion highlighted the measures being taken to reduce average net borrowing. One of these measures unfortunately dealt another blow to income-seeking shareholders: the suspension of dividend payments. Many investors will have bought Carillion as a growth stock based on its historically-consistent dividends (year to Dec 2016: 18.45p). Liberum’s analysts assume no dividend will be paid over their forecasting horizon.
Keith Cochrane has stepped in as interim chief executive, as the board strives to communicate the immediate action being taken. Mr Cochrane formerly held the reins at Weir Group and has sat on Carillion’s board since 2015.
