US Edition Carillion
384.3p +1.6
Questor says BUY
Another important piece of news was that Carillion has now signed a memorandum of understanding with the Government identifying how both parties can work together to help re-engineer procurement and service delivery, including changing the scale and scope of outsourced services across a number of its existing contracts. This is not expected to hit forecasts, but it lays the groundwork for future contract wins.
Government outsourcing contracts are not likely to be awarded until the end of this year and in 2012. Carillion could see significant growth from next year when contracts start to come through, so this presents a good opportunity for the group.
Examples of recent deals revealed yesterday include a £25bn contract with the Land Registry, which runs for five years, plus an £80m deal in a joint venture to provide facilities management services for Dow and property management services for Enexis.
Also, BAA has appointed Carillion as one of three contractors who will together provide mechanical and electrical engineering services and fabric maintenance at Heathrow Airport, a deal worth up to £75m over three years.
A further £110m will come from contracts won in Canada. The group will build the second phase of a shopping centre in Victoria on Vancouver Island and it will also construct a new hospital in Ottowa. The Canadian wins are significant. The company has made a strategic move into Canada which could to become a major market for Carillion over the coming years.
The Middle East and Canada make up just under a third of operating profits – and this year there is the potential for these markets to outperform significantly – especially when compared with the UK.
In the Middle East, Carillion's principal market sectors are construction and facilities management. In Canada and the Caribbean, the group's main sectors are health, roads maintenance and construction. This geographic diversification offers many opportunities for the group. Ontario, for example, is developing a new 10-year plan for infrastructure with expenditure expected to be more than C$50bn (£31.5bn).
Carillion said it will have net cash of about £100m at the end of the year, which is higher than analysts had anticipated. Detailed full-year numbers will be released on March 2, and they are expected to show an improvement in the company's overall operating margin, which was 3.8pc in 2009.
Management acted quickly when it was obvious that a slowdown was approaching and reduced its UK activity, especially in construction. The group plans to scale back its UK construction business by a third over the next three years – focusing on higher-margin services and international markets.
The shares are trading on a December 2010 earnings multiple of 9.7 times, falling to 9.2 next year, which is a discount to peers. The yield is an attractive 4pc.
Questor first tipped Carillion on October 22, 2009, at 310.3p and its shares are up 24pc since then, compared with a FTSE 100 up 13pc. The shares remain a buy.
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