Carillion (LSE: CLLN) has lost 80% of its value this year. Aggressive booking of long-term contracts, high and sharply increasing receivables and an otherwise thin balance sheet had led to the company being the most shorted stock on the London market. And the chickens came home to roost with a trading update in July, when the departure of the chief executive was also announced.
In serious trouble
Deterioration in cash flows on a number of construction contracts led the company to book a whopping £845m of writedowns. By the time of last month’s half-year results, there were further hits in the shape of a goodwill impairment charge of £134m relating to some construction businesses and problems beyond construction were revealed with a £200m writedown of support services contracts.
Management said average net debt in H1 was £694m and that it expects between £825m and £850m for the full year. At a current share price of 47p, Carillion’s market cap is just over £200m, so this is a company in serious trouble.
No material equity value?
Carillion is targeting £300m from the disposal of non-core businesses. However, even if this is met (by no means certain), the company warned that self-help measures alone, which also include cost-cutting and “cultural change,” will be insufficient to de-risk the balance sheet. It said: “The Board is therefore considering other available options, including raising equity to repair and strengthen the balance sheet in due course.”
The company has negotiated some breathing space with its lenders, which is short term and expensive (between 8% and 12% above LIBOR) and doesn’t solve the fundamental debt problem. Analysts at UBS have slapped a 1p price target on the shares, saying “we ultimately expect significant dilution to existing shareholders and see no material equity value left for current shareholders.” This is an extreme but far from negligible possibility, in my view, and I rate the stock a ‘sell’.
Bargain rating
In contrast to Carillion investors over at Plus500 (LSE: PLUS) are having a ball. After a Q3 update today, the shares have burst through the 1,000p level to a new all-time high of 1,040p. The company, whose platform allows retail customers to trade CFDs in more than 2,200 underlying financial instruments (ranging from equities to crypto currencies), now has a market cap of £1.2bn and is among the largest on AIM.
Today’s update provided more of what we’ve come to expect. Namely, tremendous growth in revenue (+50%) and new customers (+69%) and a lower average user acquisition cost (-47%). The company said it’s on track to report full-year results ahead of market expectations. This would mean beating the pre-update City consensus earnings forecast of 104p a share and making the P/E less than 10. In addition, there’s a juicy prospective dividend yield of 5.5%.
Long-term sustainability?
I continue to have doubts about the long-term sustainability of Plus500’s business model. It puts its success down to its “lean cost structure”, “technology leadership”, and “efficient marketing activity”, but I just don’t get how these things can be so superior to its peers as to produce such a gulf between its profit margins and theirs.
A history of legal and regulatory issues (for example, it was in hot water over inadequate anti-money-laundering controls in 2015) add to my disquiet about this business and I rate the stock a ‘sell’.