Carillion PLC: – Summary Post

Before Carillion’s share price took a tumble, investors and shareholders should have read beneath lines that something wasn’t right. This is a summary of my findings (in no particular order): –

  1. It is the most shorted stock on the London Stock Exchange with 22% of the shares loan.

 

  1. Underlying Profits rose from £43m to £151.7m, an increase of 252% from a decade ago. Meanwhile, EPS Growth rose by 55%.

 

  1. It made three major acquisitions totalling £1.2bn and these contributed £3.5bn in sales (data at the time of acquisition).

 

  1. Sticking with EPS Growth. Since their last acquisition in 2011, Carillion saw EPS fell from 37.2 pence in 2012 to 28.9 pence in 2016.

 

  1. Total borrowings reported at balance date rose from £90m to £688m over a ten-year period. But, average borrowing rose from £127m to £1bn in that same period meaning average debt is over £300m more than year-end debt.

 

  1. Furthermore, net borrowings for H1 2017 would have risen to £695m, up from £587m. Raising fears of higher debt in 2017.

 

  1. Carillion has under depreciate their assets by £83m since 2012, which automatically boosted their profits by £21m per annum. This represents 12%-15% of total profits.

 

  1. The company made ZERO impairments on assets.

 

  1. Ignoring goodwill, cash generative assets have tumbled from £600m (set in 2008) to £422m, which is the primary reason why sales have been declining.

 

  1. (Very Important): Carillion has boosted “Total Revenue” by using receivables. Most of these receivables come from “other receivables.” If you measure total receivables, as % of sales this has average 30.5% in the past four years, whereas normally it comes in at 21%-22%. This means in the past four years, Carillion has reported an extra £300m-£400m of sales per year, and that has boosted profits or “stabilised” their profits.

 

  1. Carillion’s cumulative net profit in the past five years it totalled £688.9m, while cumulative net cash flow came in at a measly £166.4m. Reinforcing point number 10!

 

  1. But, net cash flow can also be manipulated by delaying payments to suppliers. Before 2012, Carillion’s “total” payables average 29.5% of sales. After 2012, it averages 37.6%. And this would have boosted cash inflow!

 

  1. The construction division is facing the chop as Carillion begins the disposal process, however, it is this division that saw a big rise in receivables from £190m to £614m, while trade receivables saw an increase of £33m.

 

  1. Debt maturity of over £1bn is within three years, so there is a time limit set to prove to lenders that Carillion can continue as a “going concern” for the future. Otherwise, lenders will raise the costs of borrowing.

 

  1. Remember investors paid for two-thirds for three major acquisitions or over £700m.

 

  1. And speaking of acquisitions here is their financial performance after they got acquired by Carillion:

Cumulative Operating Profits

Mowlem: £27.3m;

A McAlpine: -£6.9m;

Eaga: -£232.2m.

 

Cumulative net profits

Mowlem: £159.2m*;

A McAlpine: £63.1m;

Eaga: -£242.5m.

*includes £190m profit from disposal.

 

  1. Furthermore, the acquisitions (which represent 70% of group sales) made a cumulative net loss of £20m.

 

  1. Their big HS2 win, which includes the £450m contract (Carillion’s share) represents 10% of new orders. But you should be focusing on the profitability of these orders.

 

  1. The order book/sales ratio has fallen to 3 times, the lowest in a decade.

 

  1. Expect big operating loss for 2017 and a £500m Rights issue (estimated by analysts).

 

For an in-depth read with analysis, click here.

  • Stephen Tiley

    Do a smell another Tesco-like accounting debacle?