Carillion Again

Published in Company Comment on 17 December 2009

With a return to net cash, Carillion still looks like good value.

I first reviewed Carillion (LSE: CLLN) in this series in September and subsequently published an update a couple of weeks later in October. Today I want to take a further look at this share, because last week the company published a new trading statement, ahead of its results for the year to 31 December 2009.

Back to cash

The point that stands out in the latest information is that they expect to have net cash by the year end. 

This is quite a remarkable improvement when I consider that in my original review based on the interim figures to 30 June, I noted that the net debt of £146m was pretty modest compared with the then market cap of £1.1bn. I used market cap as a comparison because Carillion has no net tangible assets. I maintained my view though that debt of any level can never be as attractive as net cash to a value player. Filthy stuff.

In my October update I quoted the company's view that net debt by 31 December should be below the half year level of £146m. And here we are a couple months later being told that it should now go net cash by that date. A really positive surprise which adds substantially to the value attractions here.

Thanks to disposals

The reasons for the anticipated turn round, going from debt to cash in six months, lie largely in disposals of parts of the business totalling about £113m in the second half. Which I guess makes it a bit less of an achievement than if it had all been due to normal business cash flow. Nevertheless the company states that:

"Underlying cash flow from operations remains strong, including increased dividends from our Middle East business, and is once again expected to exceed underlying profit from operations."

So there is a substantial element of the elimination of debt which is due to business cash flow. Very encouraging.

It all looks even better when you consider that the debt at 30 June 2008 was £264m following the acquisition of Alfred McAlpine earlier that year. After a takeover, it is quite common for the acquiring company to get rid of those parts of the business which are superfluous or don't fit their strategy for some reason. Those disposals may include areas of the purchaser's original business as well as those of the business acquired.

The numbers

Carillion's share price is now 311p, up a modest 13% on the 275p at which I first featured it. Eps for 31/12/09 and 31/12/10 is forecast at 37.4p and 38.4p giving us forward P/Es of 8.3 and 8.1. Divis are forecast at 14.1p and 14.5p giving expected yields of about 4.5% and 4.7%.

Not quite as cheap as previously but I don't think these ratios have been sufficiently blown by the price rise so far to render them unattractive. Still a go in my view.

The directorspeak on the outlook in this latest statement remains as bullish as before:

"Given the economic environment, we expect market conditions to remain challenging in 2010. However, Carillion has demonstrated that it has a resilient business mix, including strong international businesses, a substantial order book, a good pipeline of contract opportunities, good cash flow and a strong balance sheet. Consequently, the Group continues to be well positioned and believes it will make further progress in 2010."

Sounds quite good to me, especially considering the financial climate. 

Incidentally, you'd make a bit if you had a quid for every time that clichéd word "challenging" has been used in directorspeak, not just by Carillion but in so many companies. What they really mean is "lousy" but in directorspeak land the euphemism is emperor and the population lack the guts to proclaim its nudity, a place where dividends are never cut but "rebased" as another popular and nauseatingly craven example. Not that Carillion has cut of course, quite the reverse, dividends have been increasing nicely for some years. Can you "rebase" upwards?

In conclusion we now have, or can expect, net cash as an addition to the slightly worse but still present value features of reasonably low P/E and a worthwhile yield that caused me to select the share originally. 

As before, there almost certainly won't be net tangible assets unfortunately, let alone to the value player's ideal level of exceeding the share price, so we're lacking the cherry on the icing here. Despite that I considered the share sufficiently attractive earlier to make it worth featuring here and the cash news makes a substantial improvement to what I saw in it previously.

Taking all things together, I think it's an even better bet than before and the price rise so far has not in my view reflected this yet.

More from Stephen Bland:

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