Problems for crisis-hit construction outsourcing group Carillion were compounded this morning when it posted a “disappointing” set of first-half results.
Not only did it announce that underlying profit from operations reduced by 27% to £82m and underlying pre-tax profit reduced by 41% to £50m, but it also added that full-year results will be lower than current market expectations.
Total revenue is expected to be between £4.6bn and £4.8bn, down from £4.8bn to £5.0bn. On top of this it has taken a further £200m provision for support services contracts, but says this will have minimal impact on cash. This is to add to a previously announced £845m writedown on its construction work.
Shares in the former FTSE 250 company were 17.5% lower on Friday morning following the results.
The delayed results were eagerly awaited by the market after speculation this week that if the books looked better than a Middle East construction company could draw up a letter of intent to take control of the firm.
This news saw its share price rise by nearly 20%, but it still remained 75% down from where it stood a year ago when a profits warning in July caused almost three-quarters of its value to be wiped in three days.
Since the warning auditors KPMG have been more thoroughly assessing the business to decide whether the beleaguered company could continue.
Their presence has meant that the company now under the control of interim chief Keith Cochrane has probably not had chance to effectively start its restructuring process.
Cochrane called it “a disappointing set of results which reflects the issues we flagged in July.” Although he said they have made an encouraging start, he acknowledged that there are challenges that lie ahead.
He added: “The Strategic Review that we launched in July has enabled us to get a firm handle on the Group’s problems and we have implemented a clear plan to address them. Our objective is to be a lower risk, lower cost, higher quality business generating sustainable cash backed earnings.
“In the immediate short term, our focus is to complete the disposal programme, accelerate our action to take cost out of the business and get our balance sheet back to a place where it can support Carillion going forward.”
This month it also appointed Lee Watson from professional services firm EY as chief transformation officer. He will be second to Cochrane following a recent management shake-up that saw Emma Mercer, the finance director of Carillion’s construction arm, replace Zafar Khan as finance director.
Debt due to low contract bids
Amongst the challenges highlighted by Cochrane is the company’s rising debt. It stood at approximately £694m in the first half of this year. Full-year average net debt is expected to be between £825m and £850m.
The stacking debt has been attributed to weak cash flow and failure to replace completed contracts.
The company now plans to reduce the debt by selling off divisions in the Middle East, Canada and the UK healthcare sector. It is hoped this add several hundred million pounds to its balance sheet.
In a note, Joe Brent of Liberum said a problem was that Carillion has more debts than the business is worth. He estimated that the firm's "enterprise value" was £1.6bn, but he estimated total debts were around £2bn.
It was the plans for its Middle East operations that fuelled the take-over bid rumours even though some analysts say this would be unlikely.
Firstly, a new owner would have to contend with the pension deficit that stands at more than £650m - two and a half times its current stock market value of £240m.
Analysts also say it needs to raise £500m to correct its immediate cash shortfall - something that would be off-putting to buyers.
There are fears that any take-over company would cherry-pick the best parts of the group and dump the rest - a move that would herald of the end of the company that employs over 50,000 people around the world.
Analysts have stated that Whitehall has been watching developments closely given the scale of the company’s Government contracts, including those for the Ministry of Defence. It also maintains tracks for Network Rail and roads for the Highways Agency.
In addition, Carillion was one of 11 companies to secure the first major building work on the High Speed 2 railway. Some saw this as a show of Government support given the award announcement came days after the July profit warning.
A spokesperson for HS2 Ltd said at the time they had checked the firms involved remained "committed and able to deliver the contract."
It also announced in July that had been awarded two further contracts under the government’s Hestia programme by the Defence Infrastructure Organisation with a core value of £158m excluding retail sales. The DIO supports and maintains buildings and infrastructure for the armed services and is part of the Ministry of Defence.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said that Carillion employees, past and present, are going to take some of the strain of the current crisis.
He highlighted that the Pensions Regulator will want to ensure that the 28,000 members of the pension scheme are protected in light of savings plans to cut discretionary increases to retirement payouts. The company also wants to adjust annual inflationary increases by linking to the lower Consumer Price Index rather than the current Retail Price Index.
Khalaf added: "The company has launched a plan to reduce costs, cut debt and simplify management. Crucially the possibility of having to raise equity remains on the table because Carillion accepts that self-help can only take it so far.
"In other words, it needs external cash, so a rights issue is still a possibility if recent speculation about a buyer proves to be unfounded."
Future of the sector post-Brexit
Carillion is not the only construction outsourcing company to be beset with problems this year and all of them have cited the impact of Government spending cuts and Brexit on unplanned changes to contracts as reasons.
Outsourcing group Interserve saw shares almost halve this month with an unexpected announcement that its outturn would be “significantly below previous forecasts”. It was also expected to book a £160m charge in February from its exit from the energy-from-waste sector.
In March, the chief executive of outsourcing company Capita announced he was stepping down following an announcement that profits had dropped by a third last year.