Contractor takes £845m contract provision, suspends dividend for the year, and kicks off a ‘comprehensive review’ of the business
Shares in Carillion fell by a more than a third today after the contractor issued a profits warning, suspended dividends for the year, and announced the resignation of Richard Howson as the group’s chief executive with immediate effect.
In a trading statement the group said first half revenue was expected to be similar to that in 2016 at approximately £2.5bn. However operating profits for the period would be lower than expected, “primarily due to phasing of Public Private Partnerships (PPP) equity disposals, which were now expected to be in the second half”. The firm is taking an £845m hit on a number of construction projects.
Howson (pictured) was appointed chief executive in 2012, replacing John McDonough, and last year earned a total £1.5m. He will be replaced by non-executive board member Keith Cochrane, a former boss of the Weir Group, until a permanent replacement can be found. Carillion said Howson would remain with the business for up to a year while a full-time chief executive was recruited and bedded in.
The firm also announced the departure of Phil Wakefield, the managing director of its UK construction business. HIs role will be covered “for the foreseeable future” by Adam Green, the managing director of Carillion Construction Services.
The group, which has had a weak balance sheet for a number of years, added it was kicking off a “comprehensive review” of the business and its capital structure, and will unveil the results of its research at its interim results in September.
An earlier review of the business, launched in March, had resulted in an “expected contract provision” of £845m at 30 June 2017, of which £375m relates to the UK, largely three PPP projects, and £470m to overseas markets, the majority of which related to getting out of certain markets in the Middle East – Qatar, Saudi Arabia and Egypt – and Canada. Carillion said the associated future net cash outflows relating to these contracts was between £100m and £150m.
The group also said that due to a deterioration in cash flow on construction contracts, combined with a working capital outflow due to a higher than normal number of construction contracts completing and not being replaced by new contract starts, average net borrowing in the first six months of the year was expected to be £695m, well above the £586.5m figure posted for the whole of 2016.
2017’s dividends will be suspended, saving, the group said, approximately £80m.
Philip Green, Carillion’s non-executive chairman, said: “Despite making progress against the strategic priorities we set out in our 2016 results announcement in March, average net borrowing has increased above the level we expected, which means that we will no longer be able to meet our target of reducing leverage for the full year.
“We have therefore concluded that we must take immediate action to accelerate the reduction in average net borrowing and are announcing a comprehensive programme of measures to address that, aimed at generating significant cashflow in the short-term.”
Last year Carillion generated underlying pre-tax profits of £178m on revenues of £5.2bn. Its shares were down 37% this morning at 121p.