The winners and losers from Carillion’s demise
Support services company Carillion (CLLN) is being put into compulsory liquidation. What does this mean for the many companies Carillion had contracts with and is there an opportunity for rivals to pick up business?
Broker Numis says that while the event is clearly bad news for the whole industry in the short term many suppliers have been able to mitigate this to some degree by adopting low exposure to Carillion.
It adds ‘the scope for services partners to provide continuity of workload and employment on joint ventures contracts should also limit the impact’.
Tool hire firm Speedy Hire (SDY) saw its share price fall immediately on the news of Carillion’s demise although this reaction may be overdone.
Liberum says that Carillion’s joint venture partners are likely to take on much of the workload and Speedy Hire’s financial exposure is less significant than had been thought.
WHO IS DIRECTLY IMPACTED?
Those contractors negatively impacted by the fall of Carillion include FTSE 250 companies Balfour Beatty (BBY) and Galliford Try (GFRD). They have identified a hit from the Aberdeen Western Peripheral Route (AWPR) contract they had entered into as joint venture partners with Carillion.
Balfour Beatty expects between £35m and £45m cash outflow which is consistent with Galliford Try expecting both it and Balfour to need an extra £60m to £80m to complete the project.
But where there are losers there tend to be winners and Liberum thinks that there is an opportunity for construction company Costain (COST) and Balfour to win more rail work with Network Rail.
In addition, Costain and construction company Kier (KIE) could win additional roads work with Highways England and more work with utilities now Carillion is out of the picture.
Carillion’s support services peer Serco (SRP) had acquired £90m of the stricken company’s £150m healthcare assets, it’s likely that the Serco may now be able to buy the outstanding assets.
Housing specialist Mears (MER) has had ambitions to win the Ministry of Defence Next Generation Estate contracts although Liberum feels that Spain’s Amey is likely to take over that contract. It adds that there is also a risk that the government simply takes the work in-house.
Some listed infrastructure funds may feel some pain from Carillion’s end. HICL (HICL) has exposure to relevant healthcare assets and has already reduced its portfolio valuation by between £5 and £10m to reflect ‘recent profit warnings from certain counterparties’ which Numis assumes refers to Carillion. (DS)
In the longer term the Carillion debacle may put pressure on the award of public private partnership (PPP) projects. There is also likely to be a harsher glare on companies which like Carillion have long-term, unwieldy contracts, skinny margins and lots of debt.
Support services firm Interserve (IRV), for example, expects to report a 2017 year-end net debt position of £513m and it has a £44.9m pension deficit. In contrast, the market value of its shares is £174m. Analysts forecast a mere 2.1% profit margin in 2018.
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