Carillion — Trading through the troubles

Carillion — Trading through the troubles

Although 2016 results were in line, with increased revenues and positive cash flow, Carillion’s share performance reflects the challenges still evident in the balance sheet. Average net debt last year was £587m, the pension deficit at the end of 2016 was £663m (post tax) and there was an early payment facility (EPF) for suppliers of £498m at the year end. Management is tackling these with business rebalancing and ongoing cost reduction programmes. Meanwhile, the dividend was nudged up, currently yielding over 8%.

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Written by

Carillion

Trading through the troubles

Support Services

QuickView

13 March 2017

Price

230p

Market cap

£990.3m

Share price graph

Share details

Code

CLLN

Listing

LSE

Shares in issue

430.0m

Business description

Carillion operates in two main segments, Support Services (52% of 2016 revenue) and Construction (42%). It also has a PPP arm that accounts for 6% of revenue, most of which is JVs.

Bull

Strong position in UK FM market, largest player

Highly selective approach in construction. Good risk management

Favourable market trends in UK Infrastructure

Bear

Balance sheet will take time to resolve

Market conditions difficult in the Middle East

Funding for UK Infrastructure slow to emerge

Analysts

Stephen Rawlinson

+44 (0)20 3077 57 00

Toby Thorrington

+44 (0)20 3077 57 00

Although 2016 results were in line, with increased revenues and positive cash flow, Carillion’s share performance reflects the challenges still evident in the balance sheet. Average net debt last year was £587m, the pension deficit at the end of 2016 was £663m (post tax) and there was an early payment facility (EPF) for suppliers of £498m at the year end. Management is tackling these with business rebalancing and ongoing cost reduction programmes. Meanwhile, the dividend was nudged up, currently yielding over 8%.

2016 results mixed but meet expectations

Carillion’s numbers for last year were in line with expectations. Revenue rose by 14% to £5.2bn, mostly organic and underlying operating profit, as signalled, was up 1% to £254m. Revenue in Support Services rose 7% to £2.7bn and underlying operating profit was up 25% to £183m The company hinted at impending announcements about new contract wins and a shift in focus towards the UK. The former is evident in the announcement of a £490m JV contract win on 3 March in the Middle East. The UK successes have yet to emerge.

FD committed to balance sheet improvement

Carillion’s new FD, Zafar Khan, has made a commitment to reduce net debt, reversing the five-year trend. Management is incentivised to reduce year-end debt (£219m at Dec 2016) by up to £50m. New ways are being sought to handle the £50m pa of pension deficit payments. We expect the EPF will be sustained at the current level and not increased; reducing it will have no impact on working capital.

Earnings forecasts show slow, steady growth

Consensus earnings estimates hardly altered post the results released 1 March 2017, showing limited growth in 2017 and 2018.

Valuation is harsh, maybe reflects the liabilities

We expect the company to focus strongly on tackling its financial issues as witnessed by the ongoing cost reduction programme and a focus on working capital management. The 1% rise in the dividend for 2016 shows adequate restraint to preserve cash and intent to reward shareholders and provides generous yield support. Success in strengthening the balance sheet and in rebalancing the businesses to improve profitability and working capital exposure, in areas such as the Middle East, will be key to restoring market confidence.

Consensus estimates

Year
end

Revenue
(£bn)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

5.2

178.0

35.3

18.5

6.5

8.0

12/17e

4.8

181.4

34.3

18.9

6.7

8.2

12/18e

5.0

188.4

35.7

19.4

6.5

8.4

12/19e

5.0

195.5

36.1

20.3

6.4

8.8

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

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Germany

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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