Although 2016 results were in line, with increased revenues and positive cash flow, Carillion’s share performance reflects the challenges still evident in the balance sheet. Average net debt last year was £587m, the pension deficit at the end of 2016 was £663m (post tax) and there was an early payment facility (EPF) for suppliers of £498m at the year end. Management is tackling these with business rebalancing and ongoing cost reduction programmes. Meanwhile, the dividend was nudged up, currently yielding over 8%.
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Carillion |
Trading through the troubles
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Support Services |
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13 March 2017 |
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Although 2016 results were in line, with increased revenues and positive cash flow, Carillion’s share performance reflects the challenges still evident in the balance sheet. Average net debt last year was £587m, the pension deficit at the end of 2016 was £663m (post tax) and there was an early payment facility (EPF) for suppliers of £498m at the year end. Management is tackling these with business rebalancing and ongoing cost reduction programmes. Meanwhile, the dividend was nudged up, currently yielding over 8%.
2016 results mixed but meet expectations
Carillion’s numbers for last year were in line with expectations. Revenue rose by 14% to £5.2bn, mostly organic and underlying operating profit, as signalled, was up 1% to £254m. Revenue in Support Services rose 7% to £2.7bn and underlying operating profit was up 25% to £183m The company hinted at impending announcements about new contract wins and a shift in focus towards the UK. The former is evident in the announcement of a £490m JV contract win on 3 March in the Middle East. The UK successes have yet to emerge.
FD committed to balance sheet improvement
Carillion’s new FD, Zafar Khan, has made a commitment to reduce net debt, reversing the five-year trend. Management is incentivised to reduce year-end debt (£219m at Dec 2016) by up to £50m. New ways are being sought to handle the £50m pa of pension deficit payments. We expect the EPF will be sustained at the current level and not increased; reducing it will have no impact on working capital.
Earnings forecasts show slow, steady growth
Consensus earnings estimates hardly altered post the results released 1 March 2017, showing limited growth in 2017 and 2018.
Valuation is harsh, maybe reflects the liabilities
We expect the company to focus strongly on tackling its financial issues as witnessed by the ongoing cost reduction programme and a focus on working capital management. The 1% rise in the dividend for 2016 shows adequate restraint to preserve cash and intent to reward shareholders and provides generous yield support. Success in strengthening the balance sheet and in rebalancing the businesses to improve profitability and working capital exposure, in areas such as the Middle East, will be key to restoring market confidence.
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Consensus estimates
Source: Bloomberg |
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Disclaimer
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Disclaimer
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FY16 results were in line and with £8m of contract wins during the year, 7digital looks on track to deliver its targeted FY17 EBITDA profitability. The proposed acquisition of its last significant competitor, 24-7, would add scale, synergy potential and cements its position as the leading provider of platform services to the rapidly evolving digital music industry.