3 big reasons to stay away from Carillion plc

The worst may not be over for shares in Carillion plc (LON:CLLN).

| More on:

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.

Shares in troubled construction and support services group Carillion (LSE: CLLN) have fallen by as much as 76% since the start of the year. The company finally admitted on 10 July that some of its construction projects had run into problems and warned that its first-half profits would come in well below expectations.

Looking ahead, more uncertainty could lie ahead for the firm and here are three reasons why I remain bearish the stock.


The first reason I’m staying away from Carillion’s shares right now is the risk of being diluted from a need to raise funds to support a restructuring.

The company wallows in £695m of net debt — that’s up by 18% since December, and set to get even worse as a result of a deterioration in cash flows on its construction contracts, combined with higher working capital outflow going forward.

As such, some analysts reckon Carillion might need to raise at much as £500m via a rights issue or a debt-for-equity swap. By all accounts, that would represent a massive dilution for existing shareholders as the company’s market capitalisation currently stands at £244m.

Counterparty risk

Looking ahead, Carillion could struggle to keep contractors onboard and win new contracts due to concerns about higher counterparty risk, given the company’s overextended balance sheet and delays to payments on public-private partnership contracts.

Already, Oxfordshire County Council said it would end in September a 10-year deal with the company to build schools and supply property management services, a contract reportedly worth around £500m.

On a more positive note though, Carillion did recently win some lucrative work to build and design part of the HS2 rail project as part of a joint venture with Kier and Eiffage.

Further writedowns

Carillion has so far made provisions for a £845m writedown, but further writedowns are possible as a new management team takes a thorough re-examination of its legacy construction contracts. As many of these contracts are typically long term, there’s a great deal of uncertainty over the eventual profitability of these construction prospects, and as such, there’s huge potential for further revisions on its provisions.

With these three risks, I’m happy sitting safely on the sidelines.


Meanwhile, rival outsourcer Mitie (LSE: MTO) may be a better pick. After announcing its own profit warning around a year ago, it now has in place a new management team with an ambitious turnaround plan.

CEO Phil Bentley is betting heavily on technology to drive a recovery in the outsourcer’s financial performance. It has invested in a major transformation programme to improve its customer proposition and is already halfway through its £45m cost-saving programme.

While uncertainties remain, I reckon there’s considerable upside potential as the benefits of its investment programme could well feed into top-line growth and margin improvement. As such, Mitie seems to me like a lower-risk option at the moment.

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.

Jack Tang has no position in any 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

Investing Articles

Here’s why I think the Vodafone share price should be 110% higher

Reflecting on speculation, our writer believes there’s a case to be made for the Vodafone share price being more than…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Is this dividend star also the best bargain in the FTSE 100?

This FTSE 100 stock pays a whopping 8%+ yield, looks very undervalued against its peers, and is set for stellar…

Read more »

Investing Articles

2 FTSE 100 stocks. One sublime, the other ridiculous

Our writer doesn’t understand the appeal of Ocado. But looking at the grocer’s latest results makes him see the attraction…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Down 18% in a year, what’s next for the Greatland Gold (GGP) share price?

The Greatland Gold share price has disappointed over the past 12 months. Our writer asks whether the company’s latest update…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

With 30% annual returns for a decade, I’m buying this for my Stocks & Shares ISA

Oliver Rodzianko has been looking for a new investment for his Stocks and Shares ISA. Here's one he's decided is…

Read more »

Investing Articles

These were the FTSE 100’s dogs and stars in February

The FTSE 100 limped along last month, but some Footsie shares soared while others slumped. Here are February's winners and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This £43bn of passive income is up for grabs today!

As a lover of passive income, I'm always on the lookout for extra cash. The good news is that these…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Is this my once-in-a-decade chance to buy these 2 beaten-down UK shares before they rocket?

The FTSE 100 has had a bumpy ride but these two UK shares have had it bumpier. Could now be…

Read more »