Can Carillion be turned around? City analysts react to a raft of bad news

 
Oliver Gill
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Carillion said a review of its contracts by KPMG meant it needed to make a £845m provision in its accounts (Source: Getty)

If you've got lots of bad news, sometimes it's good to get it all out at once - which is exactly what construction giant Carillion appears to have done this morning.

An immediate exit for chief executive Richard Howson could be expected to give the market jitters. But layer on top an £845m provision against some of its contracts and an admission it is struggling to manage within its banking limits, and it is hardly surprising traders have been bashing the "sell" button like crazy.

Shares plummeted 40 per cent as the markets opened. They've eased back now, and were trading down around 37 per cent on yesterday's closing prices, at 121.3p, in the late afternoon.

Hargreaves Lansdown equity analyst Nicholas Hyett said:

Carillion looks like it’s trying to bail out a supertanker with a soup spoon. Despite the group’s best efforts debt is continuing to climb, and at an increasing rate, while the construction business seems to be hitting one hurdle after another.

The problems have gone straight to the bottom line of the FTSE 250 firm's finances. Annual forecasts have been revised down and dividends suspended.

AJ Bell senior analyst Tom Selby added:

The monster profit warning and a decision to cancel all dividend payments from Carillion will delight hedge funds, as the support services firm is the single most shorted stock on the UK market and the shares are down by a third in early trading.

Read more: Carillion shares have fallen 40 per cent after its chief executive quit

Short term

Amid all the disappointing news, Carillion has moved into emergency mode.

Hyett said its focus had moved to improving short term cash flow ahead of a full review in September.

However, the problem, according to Liberum analyst Joe Brent, is: "We are not sure that Carillion has the funds to restructure".

He added:

Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in construction, we believe that Carillion will need to raise a significant amount of more money.

Hyett said Carillion's short-term strategy was unlikely to be appealing to investors. 

"Judging by this announcement, the board are prepared to do everything it takes in order to save the ship," he said.

But talk of a review of capital structure, and the ongoing debt problem, will leave investors worried that a significant rights issue could be on the horizon.

Read more: Carillion joint venture bags a £200m contract with the MoD

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