The Motley Fool

One high-yield turnaround stock I’d buy instead of Carillion plc

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.

Today I’m looking at two turnaround stocks which have attracted mixed views in the investor community.

Marine services group Braemar Shipping Services (LSE: BMS) has had a mixed few years. Its recovery from the shipping downturn hasn’t been as convincing or rapid as some rivals. But I’ve been attracted by the group’s strong cash flow and modest valuation, relative to its historic profits.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Braemar published its half-year results on Monday, revealing a mixed picture. The group’s revenue from continuing operations fell by 5% to £66.6m, but operating profit, excluding acquisitions, rose from £1.4m to £2.3m. This helped to increase the group’s underlying operating profit margin from 1.9% to 3.4%.

Although much of this gain was due to a reduction in restructuring costs, I was encouraged to see that improved cash flow resulted in net cash of £6.4m, broadly unchanged from £7.1m at the end of February.

An improving outlook

The company says that its shipbroking and logistics divisions are now trading well, with new business in many areas. The technical division – which is heavily exposed to the oil and gas industry – has now been restructured. This is expected to result in annual cost savings of £6m. I’d expect this to allow the division to operate profitably at lower levels of activity.

Chairman David Moorhouse says that Braemar is “well placed to deliver a stronger second half” and the group is “in line to meet our objectives for the full year.”

My reading of this is that full-year results are expected to be in line with current forecasts. If that’s correct, then the shares currently trade on a forecast P/E of 14, with a prospective yield of 4.9%. I believe this could be an attractive entry point, and I’m considering adding more shares to my personal holding.

This is different

Shares of troubled outsourcing group Carillion (LSE: CLLN) spiked nearly 50% higher following September’s half-year results. But the stock has since given up these gains.

I’m not surprised by this. Carillion reported average half-year net debt of £694m in its results, and indicated that the average figure for the full year is likely to be between £825m and £850m. That’s seems far too high to me, given that the company is only expected to report an adjusted net profit of about £103m this year.

A second red flag is that the company’s equity or ‘book’ value – the amount left when liabilities are subtracted from assets – turned negative during the first half of the year. This implies that in a liquidation scenario, the company would be unable to satisfy all its creditors, leaving nothing for shareholders.

Carillion’s management is trying to address these problems by selling parts of the business and cutting costs elsewhere. This may succeed. But in my view the debt burden is so large that some kind of refinancing is likely to be necessary to strengthen the balance sheet and stabilise the group’s finances. This could be highly dilutive for shareholders.

The shares currently trade on a forecast P/E of just 2. In my view, this rating indicates the high risk of losses facing Carillion shareholders. I would continue to avoid these shares.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Braemar Shipping Services. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.