Beware the shorters

Yet, at least some of those losses could have perhaps been avoided if investors had paid more attention to the amount of shares being shorted by hedge funds during the year. To recap, shorting is the process of betting on a company’s share price to fall. Hedge funds and other sophisticated investors will short a stock if they believe there is something fundamentally wrong with it. If the stock falls in price, they profit.

As I mentioned several times last year, the number of Carillion shares being shorted last year looked dangerously high at times, suggesting there was something seriously wrong with the company. When short interest is high in a stock, it can pay to be very careful as often the shorters have identified a problem that the rest of the market hasn’t spotted yet.

With that in mind, today I want to warn you about another company that the short sellers are focusing on right now. Could this Neil Woodford-owned stock be about to blow up like Carillion did?

Large short interest

The company I’m referring to is FTSE 250-listed construction firm Kier Group (LSE: KIE). According to IHS Markit data, short interest in Kier has jumped from around 10% a month ago, to 18% last last week, making it the third-most shorted stock on the London Stock Exchange. BlackRock Investments, GMT Capital Corp and Marshall Wace, who all made short bets on Carillion, are among those to short the construction group.

Clearly, many sophisticated investors believe the company could be in trouble: “The shorts have smelled blood and they have progressively moved on from one contractor to another and see if they can make some money,” says Cenkos Securities analyst Kevin Cammack.

Dangerous holding

While it’s too early to tell if the shorters will get it right with Kier, I do think it’s worth being cautious towards the stock at this stage.

Apart from the short interest, there are other red flags that suggest the stock could be a dangerous holding. For example, its dividend yield is above 7% at the moment, suggesting that the market has doubts over the sustainability of the payout. Operating margins are also extremely thin, and return on equity is low.

Kier is due to report its full-year financial results this Thursday and investors can expect to hear more about the company’s efficiency and streamlining programme that it announced in July. While the group noted recently that it has made “good progress” in identifying potential cost savings, I don’t think the shares are worth the risk at present, given such a high level of short interest. As such, I’ll be steering clear of Kier Group for now.

The post Remember Carillion’s collapse? Could this Neil Woodford-owned stock be next? appeared first on The Motley Fool UK.

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Edward Sheldon 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.

It was only a few weeks from the first profit warning to the announcement that administrators had been called in at Conviviality. And while Carillion’s demise was more drawn out, the company called in the administrators only three days after management announced that the firm remained in “constructive discussions” with creditors.  

When things go south so fast it’s very difficult for the average investor to get out before suffering a total loss. The best solution is it to avoid companies like these altogether, a process that’s easier than it first appears. Indeed, both Carillion and Conviviality had several similar undesirable qualities that were on display long before the initial troubles emerged.

Cash is king

The first red flag for investors should have been the lack of cash flow from these two companies. In Conviviality’s results for the six months to the end of October, the company announced total revenues of £836m and a pre-tax profit of £6.4m. But it generated just £528,000 of cash from its operations. 

Meanwhile, according to a House of Commons report published after the company’s collapse, Carillion generated only £159m of cash from operations between 2012 and 2016. Over the same period, the firm reported a cumulative net profit of £756m and paid a total of £376m to investors via dividends.

The next two red flags are interlinked. Both Carillion and Conviviality had reasonably similar business models. They had to pay suppliers upfront for goods and services, while only getting paid themselves when the job was completed, or product sold. This means they relied heavily on the kindness of strangers, creditors and suppliers. Short-term financing, as well as a good deal of trust, is needed for this type of business model to succeed. 

Unfortunately, when analysts start asking questions about a company’s financial viability, vital financial lifelines quickly evaporate, and so does trust. Therefore, it’s imperative that these types of businesses maintain liquidity, unleveraged balance sheets. Borrowing hundreds of millions of pounds to finance a string of acquisitions is undoubtedly not the best course of action. But this is precisely the course of action both companies decided to take. Carillion and Conviviality borrowed heavily to finance acquisitions, which they struggled to integrate. As debt grew, cash flow only deteriorated.

Cash tells all 

The one factor linking all of these terminal factors is cash. Had both companies focused on cash generation and built a liquid, cash-rich balance sheet, then it’s more than likely that they wouldn’t have failed.

So considering the above, the key lesson to take away from these two disasters is, quite simply, cash is king. As investing is not a precise art, it’s unlikely you will ever be able to avoid suffering a significant loss in your portfolio. However, you can tilt the odds in your favour by avoiding highly levered companies that lack cash resources.

The post How to make sure you avoid the next Conviviality or Carillion appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

Since I last looked at the company back in December, stock in the £1bn cap — which provides ‘efficiency’ services to a wide range of businesses in the public and private sectors — has continued to sink in value. Much of this can be attributed to January’s announcement that it would be launching a £700m rights issue in order to bring the company back on track following a spate of profit warnings.

More recently, Capita has revealed that it has created a new position — the interestingly-titled Chief People Officer — who will take a broom to the company’s staff roll. The successful candidate and former Amec Foster Wheeler man, Will Serle, now supports CEO Jon Lewis in the latter’s attempts to the turn the struggling company around. 

Although full-year results have now been delayed while the aforementioned (heavily discounted) rights issue is finalised, we do know that Capita also plans to offload a number of its businesses to address its seriously overburdened balance sheet as well as focusing on those markets that offer the greatest upside in terms of growth.  

Investing in turnaround stocks can be a profitable endeavour so long as you possess sufficient skill or luck in selecting the right companies. When it comes to Capita, however, I think the risk of further downward pressure on the share price remains too great.

Instead, I’d consider industry peer Kier Group (LSE: KIE).

A safer bet?

Today’s interim numbers, while falling short of analyst expectations, weren’t disastrous. Underlying revenue rose 8% to £2.15bn in the six months to the end of 2017. Underlying pre-tax profit also increased by 5% to £48.8m. Positively, the Sandy-based business reported good returns on the money it has invested in both its Property and Residential divisions (23% and 11% respectively). 

Looking ahead, Kier revealed that 100% of its forecast revenue in its Construction and Services divisions had been secured for the year to the end of June and more than 65% secured to June 2019. The order book here now sits at £9.5bn. There’s also a £3.5bn pipeline in its Property and Residential Divisions.

According to CEO Haydn Mursell, the £1bn cap’s portfolio gives the company “balance and resilience“.  He went on to reflect that the firm looks set to deliver “double-digit profit growth” in 2017/18 and remains on track to achieve its strategic targets.

In contrast to Capita, Kier’s balance sheet appears in far better shape. Although net debt rose to £239m (from £179m in the previous year) as a result of ongoing investment, this is expected to be equivalent to “less than 1 times” earnings before interest, tax, depreciation and amortisation (EBITDA) by the end of June. A reduction in the company’s “minimal” pension deficit to £19m is also encouraging and a massive contrast to the situation at Capita. 

While a 2% hike to the interim dividend may not seem much, it’s also worth mentioning that Kier is forecast to yield a (seemingly affordable) 6.8% yield in the current financial year. 

Trading on 9 times earnings, I think the business warrants attention from those looking for value and/or income.

The post One bargain stock I’d pick over Capita plc appeared first on The Motley Fool UK.

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Paul Summers 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.

I believe the market has overreacted in the case of this trio of companies and that now could be a great opportunity to buy a slice of what I view as very attractive businesses for long-term investors.

Discount prices

The shares of HICL, INPP and JLIF are 20%, 12% and 19% below their 52-week highs and down 11%, 7% and 9% from the day before Carillion went into liquidation on 15 January. The table below shows net asset value (NAV) and dividend data for the three firms.

As you can see, HICL and JLIF are now trading at discounts to NAV and INPP at a small premium. All three companies offer generous dividend yields, based on their trailing 12-month payouts. All three have also issued updates since Carillion’s collapse. How do these bear on their valuations?

The Carillion factor

HICL: Carillion provided facilities management (FM) to 10 (14% by value) of the 116 projects HICL is invested in. It was not the contractor on any of HICL’s current construction projects, but there are five projects where Carillion was the original construction contractor and, at the time of the liquidation, held responsibility for latent defect risk. Based on current information, HICL estimates the adverse impact of the Carillion factor to be 2.8p of NAV per share (1.8%).

INPP: Carillion provided FM to 3% by value of the 127 projects INPP is invested in. It currently anticipates the adverse impact to be a negligible 0.01p of NAV per share.

JLIF: Carillion provided facilities management to nine (8.5% by value) of the 63 projects HICL is invested in. It was not the contractor on any of JLIF’s current construction projects but there is one project where Carillion was the original construction contractor and held responsibility for latent defect risk. Based on current information, JLIF estimates an adverse impact on NAV of £3m, which I calculate as 0.3p a share per share (1.8%).

Storm in a teacup?

All three companies had been aware of the issues affecting the construction and FM  giant for some time and had made contingency plans in the event of liquidation, which they’re now implementing. Principally, this concerns the appointment of replacement facilities managers.

HICL faces the biggest impact on its NAV (albeit not very big at all) and I’m encouraged by two factors to think we’re looking at something of a storm in a teacup. HICL has said: “The Board is confident that this analysis does not change the dividend guidance that the Company has published for the current financial year and the two subsequent financial years.” The other encouraging thing is that last Friday two directors and two senior managers bought shares totalling about £250,000.

With all three companies’ shares trading well down from their 52-week highs and sporting generous dividend yields, I believe now could be a good time to buy.

The post The fall of Carillion has created a buying opportunity in these 3 stocks appeared first on The Motley Fool UK.

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G A Chester 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.

On Monday morning the group released a statement to the stock exchange announcing the compulsory liquidation of the business. Trading of the firm’s shares has been automatically suspended as a result.

The effects of Carillion’s failure on public services are being discussed widely elsewhere, so I’m going to concentrate on what this means for the firm’s remaining shareholders.

Why hasn’t the company been saved?

Carillion’s lenders appear to have refused to provide the extra loans needed to keep the company going.

The amount of money needed was too large to be raised through a rights issue, and it looks as though the lenders were not willing to consider swapping some of their loans for an equity stake in the firm.

Why liquidation not administration?

Carillion has gone into compulsory liquidation. This is triggered by a court order and is managed by the Official Receiver, a government agent. It’s relatively unusual for a company to get straight to compulsory liquidation, rather than into administration.

The difference is that when a company goes into administration, the administrator’s goal is generally to find a way of saving the business. Whereas with liquidation, the aim is to sell the assets to raise cash to repay creditors. The company itself is normally wound up.

Carillion and its creditors may have chosen the liquidation route because the government will have to be heavily involved in the process as it will need to fund the continuation of some contracts until buyers are found.

What happens now?

Carillion’s main assets are its contracts, some of which stretch over many years and involve thousands of employees.

The Official Receiver will try to find buyers for these contracts. These might be companies operating in the same sector as Carillion, or other investors willing to create a corporate vehicle to operate the contracts. There’s also a possibility the government might take some contracts in-house.

Money raised by selling these assets will be used to repay some of the £900m+ of debt the company owes to its creditors. However, it seems unlikely to me that selling the firm’s assets will raise enough cash to completely satisfy those creditors.

Warning signs

In June last year, Carillion shares were trading on around six times forecast profits with a prospective yield of nearly 10%.

This extremely cheap valuation was a warning that the market saw problems ahead. Average net debt had risen from just over £200m in 2011 to nearly £600m in 2016, even though profits had remained flat.

July’s £845m contract impairment charge was the final straw. It soon became apparent that Carillion couldn’t continue without extra financing, which its lenders have now refused to provide.

Will shareholders get anything?

In a liquidation, shareholders will only receive any cash if there are surplus assets after a firm’s creditors have been satisfied.

Carillion’s last set of published accounts were published in September. These revealed that after more than £1bn of contract writedowns, the group had debts and other liabilities totalling £4.1bn, but assets worth just £3.7bn.

As the firm’s liabilities appear to be greater than its assets, I believe shareholders should expect to record a total loss on this stock.

The post What Carillion plc liquidation means for shareholders appeared first on The Motley Fool UK.

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Roland Head 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.

A spokesman said it’s finalising a business plan to present to its syndicate of lenders on Wednesday. The company made no official statement to the stock market this morning but its shares are up 17% to 22p, as I’m writing. This values it at £95m, but the trouble is, total debt is £1.5bn.

1p a share target

Sky reported that Carillion has come up with a rescue plan, which “would involve handing back some lossmaking contracts, revising the terms of others and potentially accepting financial support from the Government if it cannot secure it from private sector sources.”

This may account for the rise in the share price today. However, institutional shareholders have deserted the company in droves and I believe the price is now being driven by short-term traders and naive retail investors. They could think they see a wide margin of safety in the company’s P/E of one, but fail to appreciate the gravity and implications of its financial position.

Back in October, when the shares were trading at 47p, I drew readers’ attention to a note from analysts at UBS, who saw “no material equity value left for current shareholders” and put a 1p target on the shares. At that time, I thought this was an extreme, but far from negligible, outcome and rated the stock a ‘sell’. Subsequent events (including news of an FCA investigation into announcements made by the company last year) have persuaded me it’s a probable outcome.

In the kind of situation of extreme distress in which Carillion finds itself, a financial restructuring almost invariably involves a hugely dilutive debt-for-equity swap and fundraising and leaves existing shareholders with a token few million of equity. In Carillion’s case, this would equate to around the 1p a share of UBS’s target. As such, I rate the stock a ‘sell’ at the current price — indeed, at almost any price.

A credible turnaround stock?

Short-sellers, who went through Carillion’s accounts with a fine toothcomb a few years ago, concluded that the company’s accounting was aggressive and that its many acquisitions obscured a multitude of sins. They reckoned these issues also tainted other companies in the sector, including Capita (LSE: CPI).

Like Carillion, Capita has had to book multi-million pound impairments. However, Capita’s haven’t been as extreme and, unlike its troubled peer, it’s been able to bolster its balance sheet with an £888m sale of one of its businesses. While the company has said it expects to record further impairments in its results for the year ended 31 December, it has also said it expects year-end net debt/EBITDA to be around 2.25. This is a reasonable level and down from 2.9 at 30 June.

At a current share price of 410p, Capita trades on a P/E of 8.5. I see risk here as still elevated but infinitely lower than at Carillion. On the basis of debt being under control, the low earnings multiple and credible turnaround prospects, I rate Capita a ‘buy’.

The post Why I’d still shun Carillion plc shares at less than 20p appeared first on The Motley Fool UK.

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G A Chester 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.

Clearly, investor sentiment has been negatively impacted by the news. In the short run, there is the potential for further declines as the market digests it all. However, in the long run is the company a stock to avoid, or a potential turnaround play?

Long-term potential

While the last year has seen the company’s share price decline by over 90%, things could improve for the stock in the long run. Major changes are ongoing at the business right now, with a new CEO likely to implement a refreshed strategy. This could involve a refocus on core operations, with an asset disposal programme already under way. Alongside an efficiency programme, this could improve the long-term prospects for the business and help to create stronger financial performance in future years.

Short-term difficulties

However, in the short run there appear to be major challenges ahead. The end of April could be a key period for the business as it is when it must meet the banking covenant tests which were deferred from the end of 2017. If they fail to be met then it may mean that a fundraising is required in order to boost the financial strength of the firm. While this has the potential to be successful, there is no guarantee.

In the meantime, the trading conditions for the company remain tough. And with the FCA investigation now ongoing, investor sentiment could worsen in the near term. But with the stock now trading on such a low valuation, its potential rewards remain high. Therefore, for investors who can cope with the potential for loss and for high volatility, Carillion could still be an attractive buy.

Successful comeback

Of course, there are other support services companies that have been the subject of FCA investigations. Sector peer Mitie (LSE: MTO) announced in August that the FCA was to investigate the timing and content of a profit warning. While this may have held back investor sentiment to some degree in the months following the announcement, the stock could have turnaround potential.

Mitie is now expected to report a rise in its bottom line of 34% in the next financial year. Under new leadership, it seems to have put together a strategy which could allow it to deliver sustained profit growth over the long run. And with its shares having declined in recent months, it now trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it may offer a relatively enticing risk/reward ratio.

Certainly, Mitie is a relatively high-risk stock. It continues to face an uncertain future. But for long-term investors who are comfortable with a volatile and challenging outlook, the rewards could be high.

The post Is Carillion plc a stock to avoid after news of FCA investigation? appeared first on The Motley Fool UK.

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Peter Stephens owns shares in Carillion. 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.

So, what went wrong and was the writing on the wall for all to see?

Annus horribilis

To say that Carillion shareholders had an awful year isn’t completely accurate. Indeed, the first six months of 2017 showed little indication of the carnage that was to follow. Beginning the year at 238p, shares remained above the 200p mark until June. As the FTSE 100 began touching record highs, casual observers may have interpreted the gradual fall as nothing more than investors taking some money off the table in what was rapidly becoming a rather expensive market.

What happened next, however, was nothing less than a cautionary tale on the risks of investing in single companies. On July 7, Carillion’s stock could be purchased for 192p. In six days, this had dropped to 55p — a fall of over 70% — as investors fretted over news of contract writedowns (to the tune of £845m), worsening cashflow, the swift resignation of CEO Richard Howson and the removal of dividend payments. 

Following its inevitable relegation from the FTSE 250 in August, a “disappointing set of results” in September — including the announcement of a further £200m of writedowns — heaped even more pressure on the board. Despite continuing to win contracts (most notably to assist in the construction of the HS2 rail network), the beleaguered company issued its third profit warning in five months in November and stated that it was in danger of breaching its debt covenants. The shares halved in value in a single day.

By mid-December, it confirmed that it had reached an agreement to sell a large proportion of its UK Healthcare Facilities management business to outsourcer Serco as part of its plan to dispose of £300m worth of non-core assets. A total of £47.7m will now be paid by the latter in instalments with the first arrangement expected to be transferred in Q2 of next year. This was swiftly followed by the announcement that the company had moved the start date of new CEO Andrew Davies forward to January 22 from the beginning of April. Quite where Carillion’s share price will be then is anyone’s guess.

Tell-tale sign

Could investors have foreseen this fall from grace? While it’s easy to be wise after the event, the fact that it was by far the most shorted share on the stock exchange should have set alarm bells ringing.

Even in December, Carillion remains truly hated with nearly 17% of its shares being shorted according to shorttracker.co.uk. This suggests that many are betting against the company staging any kind of recovery.  When you compare the amount of debt on its books (now estimated at roughly £1.5bn) to the company’s valuation of just £73m, that feels entirely rational. To be sure, surviving past 2018 will be a momentous achievement based on current circumstances.

With horrific debt, no dividend and a hugely tarnished reputation, Carillion is about as uninvestable as they come and a brutal reminder for investors that taking an early loss — while difficult — can sometimes be the best course of action.

The post 2017 in review: Carillion plc appeared first on The Motley Fool UK.

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Paul Summers 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.

Carillion

As far as dud investments go, it doesn’t get much better than Carillion (LSE: CLLN) this year. Shares in the construction services company have fallen from around 240p at the start of the year, to just 17p today. That’s a decline of a staggering 93%. What went wrong?

It all went downhill in July when the company released a nasty profit warning. It stated that a deterioration in cash flows on a number of construction contracts had led the board to undertake a review of the group’s material contracts. That review resulted in expected contract provisions of £845m.

But it got worse. A further profit warning in November revealed that profits for the year are expected to be “materially lower” than current market expectations. The company also said that it was expecting a covenant breach as at 31 December and that “some form of recapitalisation” would be required.

What a nightmare. I feel for investors who have lost money here. A 93% loss is extremely hard to recover from. To break even, you’d need a gain of a huge 975%.

Yet, there were warning signs here. A large proportion of the company’s shares were being shorted. I explained that in this article.

The lesson we can take away is that it’s always worth keeping an eye on the list of companies that are most shorted. Hedge funds and other sophisticated investors are betting on the share prices of these companies falling. And there’s usually a good reason why.

If a company has a seriously heavy short interest, just steer clear. It’s as simple as that. At one stage, 30% of Carillion’s shares were being shorted. This indicates that there was something drastically wrong with the company. And the shorters were right.

Looking at the short interest now, Carillion is still the most shorted stock in the UK, with 13 funds shorting it.

For this reason, I won’t be investing in Carillion any time soon. 

Other shorted stocks to avoid

So what are the other most shorted stocks in the UK right now? From Shorttracker here’s the top 10 most shorted stocks.

Source: Shorttracker. Data as of 20/12.  

You can see that there’s a strong focus on the UK high street there, with companies such as Debenhams, WM Morrison Supermarkets and Marks & Spencer Group all making the list.

One stock that looks particularly dangerous to me is Ocado. While the company has exciting growth prospects, the valuation just looks way too high, in my opinion. Expected earnings of 1.56p next year place the stock on a forward P/E of 230. That’s a recipe for disaster. As a result, the chances are I won’t be buying Ocado shares next year.

The post Carillion plc isn’t the only stock I’ll be avoiding in 2018 appeared first on The Motley Fool UK.

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Edward Sheldon 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.

Its problems can be distilled down to one mistake; management bidding on contracts with overly-aggressive margin assumptions. City analysts have long been critical of the company’s business model and its weak cash flow and these concerns finally materialised in July when it announced that it was taking an £845m writedown on its construction book after a review of its contract book. Following this shock, management announced an additional £200m writedown a few months after. These charges plunged the group into a £1.2bn loss. 

Weak balance sheet 

With revenues under pressure, attention has turned to the group’s debt. Carillion has always made heavy use of debt due to the way its contracts are structured, the company has to foot the bill for part of its work before clients pay in full. With razor thin margins and revenues under pressure, creditors have started to question whether or not the group can repay its debts. 

In mid-November, the company told the market that it had asked lenders to delay a crucial banking test from December to April 30 and on Friday, it announced that lenders had agreed to push the test back to this new deadline. Analyst estimates of average net debt for the group for the year to December have risen from £775m in July to as high as £925m. As well as this debt, Carillion is also wrestling with a £650m pension deficit.

To help pay down debt, management has stated that it will try to dispose of £300m of non-core assets. The only disposal so far has been the £47.7m sale of the group’s healthcare facilities management business to peer Serco. 

Set to struggle next year 

Based on Carillion’s slow pace of disposals, and the company’s lack of headroom with lenders, I believe that it will struggle to survive in its current state through 2018. Even though the business employs around 40,000 people across the globe, bad management in previous years is coming back to haunt it. 

Due to the size of the business, lenders might not pull the plug, although they could force the firm to restructure. In this scenario, it’s likely Carillion would be forced to conduct a rights issue to raise additional funds. Because the company’s current market cap is less than £100m, and it has a total debt pile of more than £1.3bn, any rights issue will be extremely dilutive to existing shareholders. 

Time to sell

So overall, I believe that it is running out of time and unless the company can sell a significant portion of its business quickly, it’s likely management will be forced to conduct a cash call or declare insolvency next year. 

The post Why I believe Carillion plc might not survive 2018 appeared first on The Motley Fool UK.

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Rupert Hargreaves does not own any share 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.