Investigating revenue

Carillion’s segment valuation shows a £900m black hole


Now, their interim results are released it looks like the situation is worse than expected.

In the six months from their last annual report, their shareholders’ equity went from a positive £730m to a negative £405.2m, a £1.1bn swing in the wrong direction!

Carillion’s interim is one of those rare occasions, where we see a £760m of assets got written down, but total liabilities rose by £360m to £4bn.

It could mean that not all of their £1.2bn write-down is “non-cash” charge. You can make reference to their negative net cash earnings.


Carillion’s Construction Division (Including the Middle East)

This one division is mired by its exponential receivables growth from £192m to £614.5m when sales were falling.

In H1 17, Sales fell to £941.8m from £1,007.3m. However, their assets valuation has taken a beating, when operating assets fell from £1,180.4m to £673.4m. Meanwhile, operating liabilities rose from £875.3m to £1,120.9m.

This leaves it with net operating liabilities of £447.5m.

Meanwhile, their underlying profits came to £16m.

The construction division took the biggest write-down contributing £980m, in the form of £507m in asset reduction and the rest in the increase of operating liabilities.

With the big deterioration happening, I would deduct £447.5m from Carillion’s value.


Carillion’s support services

Their support services deteriorated slightly, with a write-down of £200m. Their net asset value fell to £1,582.4m, with operating profits to £54.7m.

Assuming a 20% operating profit reduction to £120m. Then, I will attach a 10-times multiple on operating profit and give a valuation of £1,200m.


PPP’s projects

Last year, PPP made £28m from £300m in sales. In H1 2017, it produces £6.3m in operating profit down from £19m.

Using one-third of profits from H2, then my forecast profit is £9m for the whole of 2017 giving it a valuation of £100m (I attached an 11.1-times multiple).


Adding it up

Both PPP and their support services have contributed £1,300m in value, whereas the construction division will reduce this by £447.5m to £852.5m.

Further reduction of £800m in net debt and £700m in pension deficits would wipe any value from Carillion. Deduct that by a further £450m from other liabilities would result in further red ink. We should add back deferred taxes of £165.6m.

Crunching the above numbers together give us a negative value of £931.9m for Carillion’s business.


Carillion Segment Valuation in 2016

Here is a quick remainder, and a more accurate update:

Construction Services (including the Middle East); – It has £55m in operating profits, along with net assets of £400m. But, I alluded that their construction receivables grew from £160m to £614m in 13 years, while revenue fell by £700m to £2.1bn in the same period. A write-down is likely (and has been confirmed), I assigned a zero valuation.

PPP projects; – It produced £28m profits from £300 of sales. Their net asset is negligible. So, a quick 8-time multiple on operating profits gives it a valuation of £224m.

Support Services; – their biggest division produced £150m operating profits from £2.5bn in sales. Meanwhile, it has net operating assets of £1.5bn. A reasonable valuation multiple of 10-times will prudently value the business at £1.5bn.


Adding the above valuation, it comes to £1.724bn. If we deduct/add the following:

-Net debt of £219m;

-Pension deficits of £804.8m;

-Other liabilities of £481.4m;

-Deferred tax assets of £148.4m.

Then, Carillion’s segment division values the business at £367.2m.


A Different Angle of Assessment

In my interim result piece, I estimate £815m of Rights issue is required by 2020 to address the issues of Carillion. Given that Carillion has gone from a positive of £367m to a negative £900m in valuation speaks volume. Therefore, Carillion needs to raise that level of cash.

My advice is to hold off from investment until we know how much Carillion is able to raise in a Rights issue. The amount is vital because it could mean multiple fundraising if proceeds are small (i.e. less than £200m).   


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The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.