Carillion remains a buy as focus on outsourcing pays off

Plenty of work ahead as government deals signal company’s ability to cope with large contracts

Carillion 326.7p Questor says -5.8p BUY

IT IS close to three years since Questor last looked at support services and construction group Carillion, when it was rated a buy with the shares at 300p.

Back then the construction industry was only just regaining its poise and the FTSE 250 group had just landed some major deals in Canada, including maintaining roads in Alberta and Ontario and buying a stake in Bouchier, which supports the oil and gas industry. Carillion was also in the process of scaling back its UK construction work – which has seen it shed £1bn of revenue – to concentrate on more profitable projects and outsourcing work for the Government, which makes up almost a third of the company’s total sales.

The results of that change can now be seen, with the business reporting interim results yesterday, with revenue up 21pc to £2.3bn and underlying operating profit 16pc higher at £112.5m, though flat on a pre-tax basis at £67.5m. The operating margin dropped from 5.7pc at the same point last year to 5.1pc, a decline chief executive Richard Howson flagged previously as the company adjusts to its new, smaller, size. He expects the margin to stabilise a couple of points lower.

Bright future

1 Carillion’s order book hit £17.1bn at the half year, with visibility of 96pc of full-year revenues, a figure which has since climbed to 99pc, according to Mr Howson. With a £40.5bn pipeline and a win rate of one in three, there’s plenty of work ahead.

On Her Majesty’s service

2 Winning two huge deals with the Ministry of Defence and the Ministry of Justice to maintain their estates signalled that Carillion had the ability to handle massive amounts of work. These involved 70,000 buildings and the company is now trying to secure a deal for the “soft” contracts for the MoD properties – things like catering, cleaning and cutting the grass – and the earlier success positions Carillion well for this.

China crisis?

3 Many are worried about the slowdown in China, but Mr Howson says his business has benefited as it has meant stable prices for the commodities Carillion buys regularly. Similarly, the low oil price has seen energy companies outsourcing more as they seek to drive down costs, generating further work for Carillion.

Weathering storms

4 Mr Howson says revenue growth shows Carillion has “turned the corner”. For a company that handled the recession better than a lot of rivals, and has delivered a decade of dividend growth, the future looks assured. A recent price correction means the shares yield around 5.5pc and trade at a current price-earnings ratio of 9.6. Questor maintains a buy rating.