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Carillion: How the contractor plans to turn itself around

The plans unveiled by Carillion during its half-year results show that, with a review of the business conducted by EY complete, the contractor is looking to shrink to survive.

A smaller, slimmer and more stable business will be able to tackle its underlying issues – at least that is what interim chief executive Keith Cochrane hopes.

Analyst Liberium, however, notes that the interim results are 18 per cent weaker than expectations and the firm has given itself five years to turn things around, so shareholders can expect more pain on the way.

Disposals and margins

Exiting unprofitable markets will help stabilise the business. Mr Cochrane said the firm was likely to sell its Canadian and UK healthcare businesses, and was also expected to exit construction markets in the Middle East.

The new shape of revenue also sees a dramatic drop in support services, and more focus on central government, infrastructure as well as corporate and regions. Higher margins are targeted, with corporate and regions aiming for 6.5-7.5 per cent while central government contracts have a 5-6 per cent margin target.

The disposals aim to raise £300m by the end of 2018.

Bringing down debt

Disposals will help Carillion’s position in the long term, but its debt needs to be addressed.

As Liberium notes, the shrinking construction order book means there will be less upfront cash being brought into the business (as construction contracts usually have around 10 per cent of the value paid upfront).

The restructure will also cost money to implement. Going forward net debt will be a key indicator of the health of the wider business.

Services

Carillion admitted that in services, the size and complexity of contracts is “not matched by our capability”.

The firm is taking measures to reduce risk through slowing growth in the services sector and introducing strong controls on governance.

Services contracts typically haemorrhage cash in the early years as firms make investment, only to recoup the losses at a later date.

Carillion admitted that by growing too rapidly – 17 per cent between 2014 and 2016 – it had stretched the business too far.

Construction

As Construction News reported, Carillion is looking to shrink its construction pipeline by £10bn and will keep a much closer eye on the contracts it does take on. The firm will also exit PPP construction, which currently accounts for 15 per cent of revenue. 

This comes as no surprise. Three UK contracts, which are believed to be the £353m Midland Metropolitan Hospital in Birmingham, the £335m Royal Liverpool University Hospital and the Aberdeen bypass in Scotland, account for most of the losses in the construction division.

Those contracts, combined with issues with the Middle East business, led to the £845m provision earlier this year. This figure is unchanged in the latest results, but could rise further. Carillion notes that reverse factoring (supply chain financing) of £410m is down from the H1 level of £498m, but this does need to be reduced further.

The contractor admits that among the issues it identified with problem contracts was the high degree of uncertainty around key assumptions, allowing design changes to be made without agreeing incremental costs, and also being reliant on the success of outside parties not directly under the firm’s control.

Cutting out those risks in any future contracts is key to stabilising the construction sector of the group.

Pensions

There has been progress on the pension deficit, with Carillion announcing an £80m net debt reduction to £587m, with discussions on a further £120m reduction “ongoing”.

At £650m – the pension deficit announced at the H1 results – Carillion’s pension deficit was larger than the collapsed retailer BHS; however, the new measures do look to be bringing this under control.

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