Carillion issues fresh profits warning as additional £200m is set aside to shore up the business
Carillion has revealed it is having to make provision for an extra £200m – almost 75% of its current market cap – to shore up the business in the wake of its devastating profits warning in July.
The need for the payment was identified in the strategic review implemented in the wake of the profit warning.
It has warned shareholders full year results will now be lower than previous expected.
The firm, whose shares had made successive gains of 20% and 18% over the past two days, is now bracing itself for the market reaction.
In its latest set of interim results, the Wolverhampton company said: “The extension of the review across all contracts identified the need for an additonal provision of £200m in respect of 23 support services contracts.”
This covers £91m for underperforming contracts the group has decided to exit, £56m for underperforming contracts for which expectations have been re-based, and £53m in respect of contracts for which a “more prudent view of receivables has been taken”.
In addition, it said a goodwill impairment charge of £134m had been taken in respect of the UK and Canadian Construction businesses, a provision of £11m in respect of restructuring costs in the first-half of 2017 and a charge of £8m relating to impairment of assets held for sale.
An assessment has also been made of the potential impact of international financial reporting standards due to be adopted in 2018 and based on preliminary assessments, the group expects a reduction in reserves of between £125m and £150m. It expects to give more guidance when it issues its 2017 full year results.
It has also announced plans to trim £75m in costs from the business by mid-2019.
It said a focus on core markets, a new leadership structure and implementation of the new operating model, would help achieve this.
Almost all of the savings are to be made from the UK, with £10m being achieved in 2017 and £50m in 2018. In total, £20m is expected in 2017, £50m in 2018 and £5m in 2019.
The group’s interims revealed that its first-half performance was weaker than expected with underlying profit from operations to reducing by 27% to £82m and underlying pre-tax profit reduced by 41% to £50m.
It said the reduction was due to the lower contribution to profit from PPP equity disposals and the impact of not recognising a margin on some £400m of revenue on contracts impacted by the exceptional contract provision.
Total underlying revenues were flat at £2,498m (H1 2016: £2,487m).
Commenting Keith Cochrane, Interim Chief Executive, said: “This is a disappointing set of results which reflects the issues we flagged in July and the additional £200m provision for our Support Services business that we have announced today. We now expect results for the full year to be lower than current market expectations.
“The Strategic Review that we launched in July has enabled us to get a firm handle on the group’s problems and we have implemented a clear plan to address them. Our objective is to be a lower risk, lower cost, higher quality business generating sustainable cash backed earnings. In the immediate short term, our focus is to complete the disposal programme, accelerate our action to take cost out of the business and get our balance sheet back to a place where it can support Carillion going forward.
“No one is in any doubt of the challenge that lies ahead. We have made an encouraging start and the ambition is there to build on that progress. At the heart of this company, there is a strong core. Supported by an operating model that manages risk much more effectively and led by a fresh management team with a mandate to drive cultural change, I am confident that a strong business can emerge.”