Carillion crisis: Here's how City analysts reacted to the stricken firm's £1.2bn half-year loss

Oliver Gill
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Building Development Along The Thames In East London
Carillion's shares fell almost 20 per cent minutes after today's announcement before regaining ground (Source: Getty)

Carillion this morning laid bare the extent of its woes, which included a further £200m write-down after reviewing the remainder of its contracts.

Today's announcement followed one in July that the firm would take an £845m hit after looking at 75 per cent of its agreements.

Pre-tax losses for the first half of 2017 topped £1.15bn, Carillion said today.

Interim boss Keith Cochrane said Carillion needed to "take on the chin" all of its problems, adding the firm need to "stop doing things that didn't add value".

Here's how City analysts reacted.

Read more: Carillion hit by £200m of extra write-downs as government lends support

Banks are in charge

Joe Brent of Liberum reckons Carillion has more debts than the business is worth. In a note this morning he estimated the firm's "enterprise value" is £1.6bn. But he estimated total debts were more, some £2bn.

Brent also summarised his key concerns.

Five major "headwinds" facing Carillion

  1. Reduced profitability – we expect profit before tax to fall from £147m in 2016 to £115m in 2017.
  2. Being more selective in UK construction will reduce risk, but it will also how much cash it gets up front from customers.
  3. The restructuring firm's will cost money.
  4. Management indicates that there is £412m of reverse factoring – where Carillion's customers effectively fund its suppliers – "but since this is unlikely to be part of the long term funding of the business, it will need to be reduced further".
  5. Joint venture partners and creditors who worry about the financial strength of the business may seek to hold onto cash and insist on early payment.

Read more: Carillion suitor sets sights on prized London listing

Long road to recovery

Carillion has managed to persuade its banks to lend it a further £140m under what is known as an RCF - equivalent to an overdraft for companies, and perhaps just as pricey.

Despite the write-downs, Carillion said it is operating within the parameters, or covenants, that would otherwise allow them to take control. But Andrew Gibb of RBC questioned whether this could continue.

"It has agreed a further £140m with banks and thinks it will be in compliance with covenants," he said.

However, it admits that self-help will not be enough to get to its leverage target of 1-1.5x by end 2018 and therefore the Board is considering other options, including raising equity. Clearly far too many uncertainties at present to take a firm view, but this will be a long road to recovery.

Pension pain

Hargreaves Lansdown senior analyst Laith Khalaf highlighted the firm's pensioners will "take some strain".

Carillion announced £80m of savings by cutting discretionary increases to retirement payouts. And the firm reckons it can cut a further £120m by adjusting annual inflationary increases by linking to the lower consumer price index rather than the current retail price index.

It looks like Carillion employees, past and present, are going to take some of the strain of the current crisis enveloping the company, which is planning to water down their pension benefits to rise at a lower rate of inflation, subject to trustee approval, said Khalaf.

This would bring members into line with the public sector and some other private sector schemes, though such changes are never welcome, particularly when they are prompted by disappointing business performance.

Read more: BT's Openreach checks £1.5bn Carillion deal

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