The Motley Fool

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

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.

Don’t regret ignoring this growth tip

In light of these factors, I am more than happy to sit on my hands rather than splash the cash on Carillion. But while there remains a lot of uncertainty facing the construction play in the near term and beyond, the investment case for the stock detailed in this special Fool report is much more compelling, in my opinion.

The Motley Fool's A Top Growth Share report looks at a brilliant FTSE 250 stock that has already delivered stunning shareholder returns, and whose sales are expected to balloon in the next few years. Click here to enjoy this exclusive wealth report.  It's 100% free and comes with no obligation, so why not check it out?

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.