The Mail on Sunday

More nice work should be coming Carillion’s way

- FUND MANAGER AT SCHRODERS

HAVING originally been against using the private sector, Labour has recognised over the past 13 years in power that if it wants to rebuild the country’s infrastruc­ture, it must employ private companies.

Last month’s Budget aims to make about £11 billion of efficiency savings in public spending. Whoever wins the General Election will have to make substantia­l savings above this and a lot is going to come from outsourcin­g activities to the private sector.

Government outsourcin­g started with the Private Finance Initiative. The idea was that companies such as Carillion would build hospitals, schools and roads and then have a contract to maintain them for the next 25 years. Nice work if you can get it.

The great thing for the Government was that the cost of the project would be kept out of the public accounts (in true Enron fashion) and this made the concept very attractive. Carillion would put after the Election is that the private sector will probably do the work about 35 per cent cheaper than the public sector.

More importantl­y, it is far easier for the private sector to make people redundant than for the government.

In fact, a quick glance at the continued growth in the State payroll shows how difficult it has been to lay off people. No one is clear how this reduction in central government is going to happen, but Carillion will be one of the companies in the pound seats that will take advantage of whatever is decided.

Investors tend to label Carillion as a British constructi­on company, even though this part of it is shrinking and accounts for only ten per cent of profits.

The firm aims to concentrat­e constructi­on on the PFI projects and move out of general building. The support services division can then run the facilities for the next 25 years.

Constructi­on in the Middle East represents just over 20 per cent of profits and this is an area where I expect to see some high levels of growth over the next five years, especially with oil at about $80 a barrel.

While Dubai has had a few problems, Carillion has virtually no business there. The company operates in Abu Dhabi, Oman and the other Gulf states that still resemble building sites.

More important than doing the work is getting paid at a good margin – something that other companies have struggled to do.

Carillion has increased its dividend by 14 per cent a year for the past five years, yet the shares, which closed at 334.2p last week, still have a 4.5 per cent yield and trade on a single-digit price-toearnings multiple.

This looks very cheap set against the company’s prospects, especially when taking into account the price that Babcock paid for VT Group, which is in the same sector as Carillion.

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