LONDON (ShareCast) - (ShareCast News) - Carillion has unveiled a £1.15bn first-half loss and warned full year results would be worse than expected, although stand-in management say they have a "firm handle" on the construction group's problems and have put in place "a clear plan to address them".
After completing a review of its historic contracts, the company said there was no change to the previously announced provision of £845m for construction contracts but announced a further £200m provision for support services contracts, though with "minimal impact" on cash.

Furthermore, as interim chief executive Keith Cochrane attempts to 'kitchen sink' the accounts this year, a goodwill impairment charge of £134m has been taken over UK and Canadian construction businesses.

Cochrane, the ex-Weir boss who moved into an executive role after the group's chief executive and chief financial officer departed after the massive profit warning in July, has completed a review of the business, identifying increased potential proceeds of £300m from non-core business disposals from the earlier £125m, plus initial cost savings of £75m by mid-2019, and said discussions over sales of Canadian businesses and the UK Healthcare business were ongoing. He has also agreed a further £140m committed facility with a number of banks.

"The strategic review that we launched in July has enabled us to get a firm handle on the group's problems and we have implemented a clear plan to address them," he said.

"Our objective is to be a lower risk, lower cost, higher quality business generating sustainable cash backed earnings. In the immediate short term, our focus is to complete the disposal programme, accelerate our action to take cost out of the business and get our balance sheet back to a place where it can support Carillion going forward."

First half revenue crept up slightly to £2.5bn but underlying profit before tax fell 41% due to phasing of disposals and trading of contracts to £50m, but the bottom line £1.15bn pre-tax loss resulted from the £845m write-down on construction contracts announced in July, the further £200m support services provision, and restructuring costs.

Full year revenue guidance was lowered to £4.6-4.8bn compared to the previous guidance of £4.8-5.0bn and with further restructuring costs estimated at £75-100m in the second half, the split of profits between the two halves of the year is expected to be similar to recent years, before £10m of cost savings and business disposals, meaning full-year underlying operating profit is now expected to circa 20% lower.

Full-year average net debt is expected to be between £825m and £850m with Cochrane expecting to remain within banking covenants at the full-year, even before disposals.

"No one is in any doubt of the challenge that lies ahead," Cochrane said. "We have made an encouraging start and the ambition is there to build on that progress. At the heart of this company, there is a strong core. Supported by an operating model that manages risk much more effectively and led by a fresh management team with a mandate to drive cultural change, I am confident that a strong business can emerge."

Carillion has also notified its pension trustees that discretionary increases in pension payments are being withdrawn, reducing the group's pension deficit by £76m to £587m, amid discussion with pension trustees to cut a further £120m from the deficit through a series of measures, including basing any future pension increases on CPI rather than RPI.

REACTION & ANALYSIS

Shares in Carillion, which had climbed in recent days due to rumours of a potential Middle Eastern suitor for the company, fell 18% in initial trading on Friday but after half an hour were down a mere 10% at 57.5p.

A £1.2bn loss was a considerable sum for a company with equity currently valued at under £300m by the stock market, said analyst Laith Khalaf at Hargreaves Lansdown, who said the pensions moves mirrored BT's currently attempts in court to try to push through such a switch.

"Much here depends on the wording of the scheme rules as to whether they allow the flexibility to make the change, which was permitted by the previous coalition government."

On the company has launched a plan to reduce costs, cut debt and simplify management, he added: "Crucially the possibility of having to raise equity remains on the table because Carillion accepts that self-help can only take it so far. In other words, it needs external cash, so a rights issue is still a possibility if recent speculation about a buyer proves to be unfounded.

"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. 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.

After the BHS debacle, Khalaf said the Pensions Regulator will be 'once bitten, twice shy' and he suggested any potential takeover of Carillion would therefore face a high level of public and regulatory scrutiny to ensure that the 28,000 members of the pension scheme are protected.

There was much to take in but no update on a potential new CEO, said Sam Dindol at Stifel, noting that leverage reduction to 1.0-1.5x by the end of 2018 cannot be achieved through self-help with "all options" on the table.

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