Carillion - cheap for a reason?

Carillion: Carillion divides opinion, being a mixture of services and contracting. The former is well established and is based around support services in facilities, road, rail and energy in the UK, Canada and the Middle East. In addition the group is a significant player in the ‘PFI’ market. On the contracting side the geographic footprint is similar, but the quality of earnings is far lower. In these pretty much in-line annual results to 31st December 2014 the first thing that leaps out is the operating cash flow conversion at 119%, up from 75%. This has played its part in driving net borrowing down to £177.3m from £215.2m, even after £38.5m of acquisitions. That debt level does benefit from cash held against construction projects, but is undemanding when measured against operating profits of £216.9m, up 1% on last time on a flat 5.6% margin. This hides an improvement in Middle East and support services margins being offset by lower construction margins. Underlying pre-tax profits were down 1% at £172.9m, with eps down 3% at 33.7p. This drop is attributed to planned lower PPP investment sales. The dividend was nudged up 1% to 17.75p, with cover almost at two times.

Looking forward the order book stands at £18.6bn, up from £18.0bn, with the year seeing £5.1bn of new business added against £4.9bn last year. So with revenue last year flat at £4.1bn, the hopper is being more than refilled. Further out is a opportunities pipeline of £39.2bn, with a £1.5bn six year framework deal with SCAPE announced today. In the outlook the group is relatively upbeat, citing improving macroeconomics in their key territories. However UK construction margins continue to drift, a process seen as continuing into 2016. The shares have got a bit stuck of late on the mid 300p area. Eps growth of 5% this year would be eps of 35.4p, which could see an 18.0p dividend. That would be, at 362p, a PE of 10.2x and a near 5.0% yield. These don't look demanding valuations, but the construction element of the business is likely to remain a brake on investor confidence. The yield is attractive, but better growth and better total returns may be available elsewhere in the sector, so Carillion may stay on the subs bench. (Neil Cumming^, 4^th March 2015)

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