Carillion shares plunge after profit warning

HS2 workersImage copyright HS2
Image caption Carillion is a member of consortium that is building parts of the HS2 rail link

Shares in Carillion, the UK’s second-biggest construction firm, fell 33% after it issued its third profit warning since July, adding it expected to breach financial covenants.

The firm blamed slower asset sales and delays to a Middle East project.

Carillion, which is in a consortium building part of the £56bn H2 high-speed rail link, said it was in talks on a potential recapitalisation.

The news follows separate profit warnings issued in July and September.

In its latest update, interim chief executive Keith Cochrane said: “Whilst we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.”

Carillion said profits for this year would be “materially lower than current market expectations”, and it now expected average net borrowing in 2017 to be between £875m and £925m.

“Based on its latest forecasts… the board now expects a covenant breach as at 31 December 2017”, it said.

Shares in the company have now fallen by about 90% this year.

“The company is admitting what we’ve all already suspected: it will need some sort of debt restructuring,” said Sam Bland of JP Morgan. “More organic methods simply aren’t going to be feasible”.

“If debt restructuring happens, you have to presume that current shareholders would be left with very little value,” he added.

In July this year, Carillion shares plunged after it had to set aside £845m in provisions and its chief executive, Richard Howson, stepped down.

At the time, the government was forced to seek assurances from Carillion’s partners on the HS2 project that they could step in to complete the work if necessary.

‘Too big to fail’

Carillion has been scrambling to bolster its finances amid writedowns on some of its projects.

Last month, it resorted to selling its UK healthcare arm to public-services provider Serco for £50m. The sale amounted to “peanuts” considering it was a high-margin business, said Neil Wilson, an analyst at ETX Capital.

“Disposals aren’t enough, particularly as Carillion is selling things on the cheap”, he said.

However, he added: “Some investors might think this is the end, but Carillion is too big to fail.

“Government intervention is possible but this is a nightmare for ministers at such a sensitive moment for the economy”.

Carillion has contracts in aviation, defence, retail, healthcare, education, oil and gas, and transport. On Wednesday, a Carillion joint venture signed a deal with Oman’s Ministry of Health for a new hospital in Salalah which was valued at about £240m.

Other recent deals include a joint-venture contract with Network Rail that the company says could generate up to £260m in revenue over three years.

Mr Bland of JP Morgan said contracts that have hurt Carillion include a hospital in Liverpool, a bypass in Aberdeen and a tramway in Sheffield. All three projects experienced delays of at least a year.

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