A difficult year for FTSE 250 construction services company Carillion (CLLN) has got a whole lot worse. The firm saw its share price plunge 35% to 125.7p on Monday in the wake of a profit warning that has cost CEO Richard Howson his job.
The anticipated 18.6p dividend this year has also been axed.
This will not come as a major shock to some investors. According to information from the Financial Conduct Authority, Carillion has been the most shorted stock for the last 18 months. Funds that have kept their short positions are now looking at a big payday.
To ‘short’ shares, an investor borrows the stock from an institution that holds it, then sells it in the market. The idea is to buy back the stock at a later date when the price has dropped generating a profit.
Carillion’s warning comes as new projects dry up. The company has also had to set aside an £845m provision relating to contracts in the UK and overseas. The majority of this relates to exiting markets in the Middle East and Canada.
The company says that the associated future cash outflow for these contracts could reach £150m by 2018.
FORECASTS CUT
The company has revised down previous guidance, on which market consensus had based its £5.1bn of revenue for the 12 months to 31 December 2017. Revenue this year is now expected to fall somewhere between £4.8bn and £5.0bn.
Unsurprisingly, analysts have also got out their red pens. Joe Brent, analyst at Liberum, has snipped 7.7% off his previous 2017 sales estimate, taking expectations down to £4.7bn.
Hector Forsythe, analyst at Stifel, remains is positive on Carillion, repeating his target price of 290p. The analyst derives his valuation on a sum-of-the-parts calculation for each of Carillion's different operating divisions, creating an enterprise value (market cap plus debt) to earnings before interest, tax, depreciation and amortisation (EBITDA) which also factors in pension deficit obligations.
ACTION PLAN
Carillion has already taken steps to right the ship. These include exiting from public private partnerships and getting out of construction markets in Qatar, Saudi Arabia as well as Egypt. The company hopes to raise about £125m cash from disposals over the next 12 months.
But cash remains tight, hence the cut in the payout whcih will save Carillion about £80m this year. Cost savings and disposals are designed to keep borrowings manageable. Net debt for the first to 30 June is expected to come in at around £695m, a big jump on the £586.5m level at the end of 2016.
Liberum’s Brent doubts whether there will be enough available funds for Carillion to execute its restructuring. That implies an emergency cash call is very likely, and probably at fairly hefty discount even to the current share price.
‘Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in construction, we believe that Carillion will need to raise a significant amount of money,’ says Brent.
