Positive trading news doesn’t make Carillion plc a ‘buy’ for me

Royston Wild explains why Carillion plc (LON: CLLN) remains a risk too far despite recent trading news.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investor appetite for Carillion (LSE: CLLN) was buzzing again on Monday after the company advised of exciting trading news. The stock was last 2% higher from the end of last week and at one-month highs.

The troubled support services group announced that it has managed to grind out two new contracts in relation to Network Rail’s ‘Midland Mainline’ rail improvement programme, work that could net it in excess of £320m.

Carillion said that it had been chosen to help upgrade the existing track and infrastructure on the London to Corby rail route, a contract that could create revenues of £62m.

And the firm’s Carillion Powerlines arm (a 50:50 joint venture with Powerlines Group) had inked an accord to complete the electrification of the route. Revenues from this contract are expected to register around the £260m mark, Carillion said, and work on this will commence shortly.

Punching back

At face value it is not so surprising that investors are pretty upbeat, given that Carillion has been grabbing the headlines recently with news of other contract wins.

In late October the business advised of three bumper accords worth hundreds of millions of pounds. It signed a £200m deal to build a broadband network on the South West of England; a £105m deal to build residential apartments in Dubai Creek Harbour; and a £71m contract to build student accommodation for the University of Manchester.

Carillion has been making progress in other areas, too. Late last month it advised that its search for a new chief executive had come to an end after the appointment of former BAE Systems man and current Chemring director Andrew Davies to the role. Davies will take on the position from next April.

And in its bid to shore up its battered balance sheet, it has announced the disposal of property developers Ask Real Estate and Ask Carillion Developments for £13.8bn. It has also hived off a large part of its UK healthcare facilities management division to Serco for £50.1m and has signed new committed credit and bonding facilities recently to give it more financial wiggle room.

… but still on the ropes

While news has certainly been more promising of late, there is no secret that times are likely to remain tough for some time yet — indeed, City brokers are expecting the firm to endure a 35% earnings slump in 2017 and an 11% slide in 2018.

However, there is an increasingly difficult backdrop that the business is likely to continue facing as the construction industry struggles amid tense Brexit negotiations lasting into next year and probably beyond. So even these frankly worrying projections are in danger of downgrades in the months ahead. When you also consider the rapid rate at which Carillion’s cash flows have been deteriorating, I reckon it is far too early to consider the share as a bona-fide turnaround stock.

Given that further trouble could be just over the horizon, I reckon Carillion should still be avoided despite its cheap paper valuation, a forward P/E ratio of 2 times.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »