Thursday 5 July 2012

Portfolio Buy: Carillion (LSE:CLLN)

The quest for sustainable income for the portfolio continues with the purchase of dividend-earning shares in Carillion

The company is a leading integrated support services company with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. Carillion provides expertise in commercial and industrial building, refurbishment, civil engineering, road and rail construction and maintenance, mechanical and electrical services, facilities management and the UK's Private Finance Initiative - outsourcing government investment.

Carillion currently offers a dividend yield of over 6%, with a p/e of under 10, forecast dividend cover of 2.5, falling debt and good cash flow - what's not to like? Kevin Godbold of Motley Fool likes it "as a cautious buy, but it's worth bearing in mind their cyclical nature".

The Group had annual revenue in 2011 of some £5.1 billion, employs around 45,000 people and operates across the UK, in the Middle East and Canada. The Group has four business segments:
  • Support services - including facilities management, facilities services, energy services, utility services, road maintenance, rail services and consultancy services
  • Public Private Partnership (PPP) projects - including investing activities in PPP projects in Defence, Health, Education, Transport, Secure and other Government accommodation
  • Middle East construction services - including building and civil engineering activities
  • Construction services elsewhere - including building, civil engineering and developments  activities in the UK and construction activities in Canada

The July 2012 Trading Statement paints a picture of a business managing - reasonably successfully - to cope with the economic downturn, particularly in the UK:
  • No surprises: first-half trading is in line with expectations despite market conditions remaining challenging; however this means that total revenue will be lower than in the first half of 2011
  • Profitability is holding up: total operating margin is expected to increase
  • Cash flow and balance sheet remain strong with net debt expected to be around £125m
  • A further £20m of equity in Public Private Partnership (PPP) projects has been sold
  • Strong order book: total first-half new orders and probable orders worth up to £2.2bn 

Carillon therefore has an interesting international profile plus the right skills to profit for more outsourcing of government expenditure, which seems to be the way that the UK government is hoping to go for much of its procurement. Middle East markets can be a bit unpredictable - as the debacle in Dubai showed - but the region does not exhibit the depression symptoms of Europe. Canada is an interesting market that could develop in a very positive way, given the skills that company has developed.
(Purchase price £2.70 in July 2012)
 Update (30/8/12):  a positive article by City Wire's Smart Investor.
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I've looked at Carrilion a few times, but there's something about these support services companies that puts me off. Probably why I never made a fortune from Capita! ;)

    Have you looked at Morgan Sindall? Wafer thin margins but has survived through the recession(s) with a 7%-ish yield, and has a very entreprenerial leader/founder at the top. (I own).

  2. Hi Monevator

    Yes, I hold Morgan Sindall as well.

    You may well be right about Carillion - the price promptly fell 6% (!) after I bought it following broker downgrades - amazing how the same market information can lead to such different conclusions. I'll be holding for now.

  3. I hold Balfour Beatty and WS Atkins, but am still considering adding Carillion.

    None of these are intended to be as long-term holds as my utilities, supermarkets, pharma, etc., but I don't see anything wrong with combining income investing with value investing.

  4. From what I hear, Carillion aren't getting much new UK work (there is nothing to win) - the PPI stuff will hold up for the time being. Abroad is where it is all at.

  5. I bought just after the 6% drop, for the same reasons that it looked good in the first place - an even better value after the cut. Fortunately, the market seems to have almost brought it back up, this looks like a solid business so I'm happy to buy and hold.

  6. I had been watching these for a small while and your article increased my tendency to buy. With Mr Market being so fickle you can never know if its the right time. Shortly after your article it rose then dropped again. Hopefully I have been a little bit more "lucky" with my timing (27/7) but hopefully this company has fallen far enough and will ride out the storm with a nice divi until things get better. There is the possibility of further falls when Mr Market drags everyone down so I may look at add a few more then. I dont know if you like to avg down.

    I'm hoping that in time we both have found a bargain and that the reward offsets the risk. Enjoy your jollies


  7. Carillion have this week advised their subcontractors that they are to delay December payments until January 2013, they have probably told their suppliers the same,has anybody else heard about this? this has put a lot of subcontractors in a very difficult situation being unable to pay their suppliers/employees

  8. Coming to this almost a year late. I'm a subbie for Carillion and I get paid regularly. I also hold a few shares in the company. Why? They always seem busy, always getting more work, always seem to make a profit. How did I end up here? Considering buying more so doing my research. Looks like I'll be adding a few more to my meagre portfolio :-)