Carillion - trying to forget Balfour Beatty

Carillion: This support services stock is not everyone’s cup of tea, due in large part to the contracting element of the business and the distorting effect that can have on cash conversion. The seemingly mis-guided acquisition of energy efficiency firm EAGA in 2011 lost them a few fans too. The rash tilt at Balfour Beatty this year was one that shareholders must be glad failed, but again called into question management’s judgement. Of its sort though, Carillion is one of the best and by luck or judgement has so far stepped around the banana skins better than many. In the pre-close statement, for the year to 31^st December 2014, they confirm that earnings are in line with expectations and that the “medium-term outlook remains positive”. Looking ahead, the order book, having been £18bn at the last year end, is expected to be a healthy £18.5bn plus at year end, with a high 85% of expected revenue already booked for 2015. The pipeline of opportunities has expanded from £37.5bn to “over £39bn”. Underlying net debt is trending down, although this is being affected at the headline level by acquisition costs. Average net debt for 2014 is expected to be around £460m, down £30m on last year. In this statement they go to some effort to reassure that they are being picky and choosy about work, with an expectation that, despite various pressures, they can maintain operating margins around last year’s levels.

Last year eps were 34.7p and if they can repeat that then at 340p the shares are on 9.8x. Eps are in a valley, having been over 40p in 2011 and 2012, but despite dividend cover dipping below 2x, the interim was raised by 1.8%. This implies a full year total of 17.8p for a yield of 5.2%. These valuations seem fair enough for a group with their mix of businesses, but post the Balfour Beatty escapade and with the shares towards the top end of their trading range, there is no rush to buy. (Neil Cumming^, 10^th December 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower