Carillion is among the most shorted shares on the London market and a first glance at the 2016 results gives an understanding why. Margins deteriorated, debt ballooned and the pension deficit was significantly higher.
Take a second look and things seem a little brighter. Margins at the construction side, in the Middle East and elsewhere, are running at between 2 and 3 per cent and are not going to get a lot higher. Support services, the biggest part of Carillion and the bit that looks after roads, railways and other assets, dipped below 6 per cent, though they should be back above that level this year.
Debt rose from about £170 million to almost £220 million at the year end, averaging almost £590 million through the year, but £68 million comes from foreign exchange movements and the total would have been lower but for this. Of that forex movement, only about half will add to borrowing costs. The pension deficit increase is unavoidable, entirely down to lower bond yields.
The visibility of this year’s revenues fell from 84 per cent last year to just 74 per cent for 2017 but again this is down to one-off factors, a higher than expected revenue figure for last year. The pipeline of contract opportunities is little changed at £41.6 billion and there is plenty of work coming up in Britain, some of it possibly signalled in next week’s autumn statement as the government looks at the next wave of public private projects.
Carillion has pulled out of its Caribbean construction work and is not bidding for more in Canada, where existing contracts are being wound down except for lower-risk ventures.
All the above meant revenues were up by 14 per cent but underlying pre-tax profits were up just 1 per cent to £178 million. Borrowings will have to be cut, but the company insists that this can by done by more efficient capital management and not by selling businesses, raising fresh equity or cutting the dividend.
The decline in the share price, off another 12½p to 206½p yesterday, means the shares are yielding almost 9 per cent and sell on six times earnings. That looks startlingly cheap, if that rights issue and dividend cut can be avoided, but the shares are not for the nervous.
MY ADVICE Buy
WHY If the company’s pledges on debt and dividends are reliable shares look undervalued, but this is still a high-risk purchase
Vertu Motors
Investors have a clear enough choice when it comes to Vertu shares. Are they prepared to invest in one of the better-positioned plays on British consumer spending even as most expect this to turn down? The company, which owns 125 car dealerships in Britain, is taking a cautious view of new car sales this year, siding with the Society of Motor Manufacturers and Traders, which expects a 5 per cent fall in numbers sold.
Even a small decline would reflect another year of strong appetite among consumers for new vehicles. In any event Vertu, like its rivals, gets most of its profits — 70 per cent — from used cars and after-sales service. The trading update for the five months to the end of January shows revenues from sales and service comfortably ahead by
mid-single-digit percentages.
Vertu has the support of owning properties on its estate that are worth almost all its near £200 million market capitalisation. It has grown by acquisition and has negotiated a new banking facility allowing it to spend £70 million. The shares, up 1¾p at 49½p, are well below their pre-referendum level and sell on about eight times earnings.
MY ADVICE Buy
WHY Vertu is well placed even for a consumer downturn
Elementis
Results from Elementis, the specialist chemicals business, look a touch irrelevant. First, the company had already flagged up the reasons why profits would be sharply down for the year, off 22 per cent at the pre-tax level to $89.7 million. The decline in the price of oil has hit demand for its additives that lubricate oilrigs, though there are signs of an improvement as the price stabilises — the US oilrig count has risen in recent weeks.
The other problem is that the high dollar is making its chromium business, which supplies anything from aircraft parts to leather tanning, less competitive — especially against Russian and Kazakh producers who have the benefit of a low currency.
All this was known. The second reason the figures look historic is that Elementis has just announced a transformative $360 million purchase in the US, which will mean it will get about a quarter of sales and 30 per cent of profits from personal care products, specifically antiperspirants. The purchase is of SummitReheis, which is close to its east coast operation. Both make complementary ingredients, with opportunities for growth in emerging markets.
This means that the special dividend, representing half the remaining cash at the year-end that has run for five years, will not recur for 2017 because of the debt taken on, which rather clips back the yield on the shares. These were up sharply on the deal; they came back 4½p to 295¼p yesterday. On about 20 times earnings they look fully valued.
MY ADVICE Avoid
WHY Deal is a good one but shares have risen sharply
And finally ...
Bunzl was assuring us only at the start of this week that the supply of acquisitions was not in danger of drying up after a relatively quiet 2016. The company has just landed a fairly big one, after a small entry into the Singapore market also announced on Monday. It is buying Diversified Distribution Systems of Minneapolis, which supplies retailers in North America and elsewhere with bags, hangers and the like. No price is given, but analysts reckon the deal is worth more than £120 million.
