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): –
- It is the most shorted stock on the London Stock Exchange with 22% of the shares loan.
- Underlying Profits rose from £43m to £151.7m, an increase of 252% from a decade ago. Meanwhile, EPS Growth rose by 55%.
- It made three major acquisitions totalling £1.2bn and these contributed £3.5bn in sales (data at the time of acquisition).
- 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.
- 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.
- Furthermore, net borrowings for H1 2017 would have risen to £695m, up from £587m. Raising fears of higher debt in 2017.
- 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.
- The company made ZERO impairments on assets.
- Ignoring goodwill, cash generative assets have tumbled from £600m (set in 2008) to £422m, which is the primary reason why sales have been declining.
- (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.
- 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!
- 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!
- 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.
- 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.
- Remember investors paid for two-thirds for three major acquisitions or over £700m.
- And speaking of acquisitions here is their financial performance after they got acquired by Carillion:
Cumulative Operating Profits
A McAlpine: -£6.9m;
Cumulative net profits
A McAlpine: £63.1m;
*includes £190m profit from disposal.
- Furthermore, the acquisitions (which represent 70% of group sales) made a cumulative net loss of £20m.
- 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.
- The order book/sales ratio has fallen to 3 times, the lowest in a decade.
- Expect big operating loss for 2017 and a £500m Rights issue (estimated by analysts).
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