US Edition Carillion
319.9p -1.9
Questor says BUY
For investors with money, market falls such as these present an opportunity. Good companies are becoming cheaper by the day and, if you are going to buy shares, the trick is to get them when they are cheap.
Once such company to look at is Carillion, the construction and outsourcing business.
The main problem with the valuation of Carillion appears to be one of perception. The market seems to be valuing it as a UK construction company, yet this represents less than 20pc of Carillion's operations – and the company is actively reducing activity here.
The main profit drivers going forward are support services and its construction activity in the Middle East and Canada.
The group's recent interim numbers were slightly above consensus. In the six months to June 30, revenues lost 2pc to £2.5bn, with pre-tax profits down 35pc to £38.2m. However, when one-off items such as reorganisation and financing costs are removed, "underlying" pre-tax profits rose by 10pc to £72.5m.
The dividend was raised by 10pc to 5.3p and this will be paid on November 9. This is attractive and the shares are yielding a prospective 5.2pc, rising to 5.6pc next year. This is a very solid yield.
The order book stood at £19.4bn, up from £19.1bn six months ago, with the "pipeline of opportunities" rising to £32bn from £25bn. These include contracts on which it is bidding or expects to bid soon. It is likely that this figure is being driven by public-sector contracts.
There has been a mixed view on opportunities presented for outsourcers by the current round of cost-cutting by local authorities. Some argue this is an unprecedented opportunity for the industry, while others are more sceptical and point to the absence of any large deals in the sector to date.
However, it is unlikely there will be many deals unveiled until next year. Local government is currently in flux and it takes time to negotiate important contracts such as these.
News flow from Canada is likely to be faster. In fact, Carillion actually announced a deal alongside its interim numbers in Ontario. The company said it had secured a contract in Ontario and a preferred bidder position in Alberta for road maintenance work worth in the region of £200m over 11 years.
Canada has survived the financial crisis very well and offers plenty of opportunities in outsourcing, as there is a much smaller penetration than here in the UK.
Medium-term objectives for Carillion remain the same. It sees substantial organic growth in UK support services from 2012 onwards and it plans to double international revenues over the next three to five years.
The shares are trading on a December 2010 earnings multiple of 7.5 times, falling to just 7 next year, which appears derisory.
Questor first tipped Carillion shares on October 22, 2009, at 310.3p and following recent falls the shares are up just 3pc since then, compared with a FTSE 100 down 1pc.
The shares remain a buy.