Carillion - good value, but still not that tempting

Carillion (CLLN.L): This is a stock where the combination of support services and construction leaves investors uneasy. That said, the group seems to be chugging ahead quite nicely at the moment. In these interims, to 30^th June 2015, new contracts helped revenue jump 21%, with underlying operational profits up 16% at £112.5m. Operating margins fell 40bps to 5.1%, reflecting in part transient new business strain and ongoing construction margin erosion. Pre-tax profits were up 11% at £84.5m, but these were bolstered by disposal proceeds. Underlying eps were up 8% at 15.9p and the interim dividend, as has been the case since 2011, was nudged up by 0.1p, being a 2% rise to 5.7p. There have been times in the past when cash conversion at Carillion has been weak, but in these numbers it was 101% (albeit down on 127% a year ago). Net debt rose to £199.6m from £177.3m six months ago, with business acquisition costs cited as one reason, although average net debt was up some £35m at £486.5m, (with a hefty £356m pension liability on the balance sheet). The order book fell £1.5bn to £17.1bn over the six months, with new orders collapsing from £3.2bn a year ago to £1.0bn, reflecting the usual hiatus over a General Election period. All the same, the pipeline of opportunities edged up from £39.2bn to £40.5bn over the period.

Looking ahead, whilst the UK election hiatus should have passed and Government business should pick up. Whilst they seem to be doing well in the Middle East, the economic strain of weak oil markets is something to keep an eye on. Revenue visibility for 2015 is now right up at 96%, so the group expects to meet forecasts for the year, with analysts expecting modest growth in 2016. Despite a good first half, consensus for 2015 is actually for a small drop in eps to 33.2p, but at 322p, that is a PE of 9.7x. The recent pattern has been for the total dividend to go up 0.25p, pointing to 18p for a 5.6% yield. This all looks cheap, but the business may not be that resilient to external buffeting and the balance sheet (with that pension deficit) will not reassure all. Normally the low valuation would tempt me, and progress has been made. Yet I saw little rush at 362p when I wrote on the stock back in March and not enough has changed. At the moment weak stock markets mean that there are other tastier fish to fry and investing in Carillion can still wait for another day. (Neil Cumming^, 26^th August  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