While Carillion (LSE: CLLN) may have bumped off the record lows around 55.5p per share struck in the aftermath of this month’s shocking half-year trading statement, the firm is clearly still not yet out of the woods.
Indeed, to describe the construction giant as being in a complete state of disarray would be bang on the button, in my opinion. The company’s pledge to “accelerate the rebalancing of our business into markets and sectors where we can win high-quality contracts and achieve our targets for margin and cash flows” back in March has clearly come far too late.
To recap, Carillion rocked up in July to warn that a “deterioration in cash flows on construction contracts, combined with a working capital outflow due to a higher than normal number of construction contracts completing and not being replaced by new contract starts, means [first half] average net borrowing is now expected to be £695m.” This compares with £586.5m for the whole of 2016.
Underperformance across some of its contracts at home and overseas has seen the company set aside an eye-watering £845m in provisions. And this turmoil has forced the Midlands-based business to put the kibosh on dividend payments, too.
Adding to the malaise, chief executive Richard Howson elected to stand down and hand over the reins of Carillion’s recovery strategy to someone else, leaving the company rudderless at this crucial time.
Carillion has now lost 70% since that shocking statement of just three weeks ago. And it looks as if the company could be set to keep on disappointing.
Too much risk?
The experts at UBS expect earnings at Carillion to slide to 26.4p per share in 2017 from 31.9p last year and, unsurprisingly, the brokerage does not expect the woes to end there. Another slip, to 23.8p, is currently anticipated for 2018.
Many investors may still consider the FTSE 250 laggard worth a punt on the back of these insipid estimates, however. The business is certainly an attractive pick on paper, at least, with Carillion boasting a forward P/E ratio of 2.2 times, some distance below the bargain benchmark of 10 times.
But I won’t be piling in any time soon. News of contract wins on the HS2 rail project, and two new HESTIA North, and Scotland and Northern Ireland soft facilities management deals by the Ministry of Defence, may have given Carillion a much-needed shot in the arm in recent sessions. But one cannot help but suspect that this is will prove a mere sticking plaster for investor confidence.
The scale of restructuring the business is about to embark on creates plenty of uncertainty, with massive equity raising on top of asset sales being hotly tipped in many quarters. Meanwhile, the possibility of further downgrades to earnings forecasts in the near-term and beyond, as the planned pullbacks in certain markets and territories takes off, and the UK construction market showing signs of growing stress, all adds up to further angst. These issues make Carillion a risk too far even in spite of its low valuations.
Indeed, I reckon interim CEO Keith Cochrane’s balance sheet and structural review scheduled in September could prove the catalyst for the another painful share price retracement.
