LONDON (ShareCast) - (ShareCast News) - Embattled construction and support group Carillion plummeted lower for a second day on Tuesday, as analysts picked apart the company's horrendous trading update at the start of the week.
After losing more than a third of their value on Monday, shares in the FTSE 250 company fell another 15% on Tuesday morning to reach levels not seen since late October 2000, before taking a further leg lower below 90p to make it a 55% fall in two days.

Interim chief executive Keith Cochrane will now start a strategic and balance sheet review which will be presented with interim results in September, with no options ruled out.

Analysts at UBS, which maintained its 'sell' rating on the shares, said the main question now was how can the company recapitalise itself, being "in a tough position" with leverage of around £1.45bn being more than six times estimated adjusted operating profits of £227m for the full year, even before taking account of £420m of average reverse-factoring.

With Carillion reassuring about its debt covenants UBS saw "no immediate liquidity issues" but said the strategic and balance sheet review could include the raising of fresh equity, a debt-to-equity swap, asset disposals or a combination of all three, though disposals may hit earnings.

"The potential outcome for current shareholders remains highly uncertain at this stage," the Swiss bank said, giving a sum-of-the-parts estimate of the shares of 78p.

Morgan Stanley said "further write-downs are possible" as the contract review continues under a new CEO.

And while agreeing that there is limited covenant risk, "sustainable leverage levels are unclear and are likely to remain so until the capital structure review in September".

"The objective to delever is paramount, in our view, but there is a question over whether this can be achieved organically, as working capital outflows are likely as the construction business unwinds and we see limited trophy assets that can realise value," analysts wrote.

Broker Numis cut its PBT forecasts by 25% for the current year and now assumes a flat PBT profile for next year, with zero dividend in both years.

Numis sees further contract issues emerging from the review, given that the KPMG review was some 58 contracts in 'enhanced review', which account for some 73% of total receivables.

Taking a technical view, analyst Mike van Dulken at Accendo Market said investors -- both those nursing losses and those circling for a bargain -- were asking where the shares would find the next levels of support, having on Tuesday breached levels from the fourth quarter of 2002.

Van Dulken saw no technical support until the 83p from autumn 2000 and then 81.5p all-time lows from March that year.

"This doesn't sound far away, but the lowest of the two represents another 17-18% fall from here," he said, noting that it was "still early days" in terms of the announced capital structure review.

"This could easily comprise a highly dilutive rights issue to reduce debt and shore up the balance sheet. Hedge funds have already done well by shorting the stock in anticipation of corporate troubles. However, they may decide to stay the course seeing these financial woes (financial stress, profits warning, dividend suspension, CEO departure) having legs, and expecting the above-mentioned remedial work to take the shares even lower."

"The shares are flirting with 100p again, however, this may simply be psychological. A near 50% discount may be attractive but the overhang of a steadily increasing debt pile at odds with poor cash flow and a lack of leadership may prove too much to ignore for even the most daring of bulls."

This flirting did not last long, as the shares continued to descend lower and lower as Tuesday's session wore on.





Stifel's Hector Forsythe remained more optimistic, relatively, but still downgraded the shares to 'hold' from 'buy'.

At the company's core, it is a strong support services business, he wrote, but it has been hit by construction activities where "risk has dramatically trumped reward" as four contracts have met significant issues, leading to management's decision to withdraw from non-core markets, suspend the dividend and part company with the CEO.

"The challenge is to re-balance capitalisation, peel away non-core activities and allow clear sight of the core for all stake holders," he said, although noting that the contract writedowns have removed significant value of close to 160p a share after tax.

His 'hold' rating "requires belief that asset and liabilities are now fairly stated" and he acknowledged that significant risks remain, as demonstrated by the provisioning announced with the H1 trading update.

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