Why one analyst loves construction firm Carillion

Suzie Neuwirth

Construction services firm Carillion’s share price has soared over five per cent today, after an upgrade from Cantor Fitzgerald.

The research note put a “buy” recommendation on the FTSE 250 firm and increased its target price to 420p from 350p, in part due to a strengthened order book and downsizing of the struggling UK construction division.

“We believe that Carillion is in a much better shape than it has been in recent years,” said the research.

“The re-sizing of the UK construction division is now complete and removes one of the main headwinds to the top line performance. Progress in support services has been disappointing of late, with the Eaga acquisition proving to be ill-timed, but we believe that the worst is now over.”

Carillion bought the energy efficiency products supplier Eaga in April 2011, but the firm was heavily dependent on government-funded schemes and fell into trouble after feed-in tariffs were halved.

“Underpinning our increased optimism is the recent strong period of contract awards,” continued the note. “In 2013, £4.9bn of new and probable orders were won, significantly ahead of annual sales of £3.3bn. Momentum has carried over into this year with, to date, £0.9bn of contracts announced including some sizeable opportunities in support services.”

Carillion recently completed the rescaling of its UK construction business that it started in 2009, amid a challenging market due to reduced government spending.

“The downsizing of the UK construction business inevitably had an adverse impact on cash flows given the working capital outflow associated with this restructuring…With the rescaling now complete we expect to see a significant improvement in cash conversion,” said Cantor Fitzgerald.

Additionally, the broker sees Carillion as attractively valued compared to its peers and says it offers one of the highest dividend yields in the sector.

It’s also optimistic about the firm’s long-term growth prospects in the Middle East and says opportunities in public private partnerships are “the strongest ever”.