It’s dividend is suspended.
It’s CEO has left.
It’s balance sheet is a mess.
These are just a few of the things wrong with the business behind the stock: Carillion Plc (LSE: CLLN) and the collapse of Carillion’s share price this week has been well documented.
But the deterioration of the business itself has been ongoing for at least two years.
More to the point the price may very well go down even further from here so caveat emptor!
Carillion Plc’s Balance Sheet
Total liabilities rose £850 million from 31 December 2015 to 31 December 2016.
Here are the three main culprits what I found from the numbers up to 31 December 2016:
- an increase in retirement liabilities of circa £400 million
- an increase in trade payables of £376 million
- an increase in borrowings of £60 million
According to the notes to the accounts the increase in retirement liabilities was due to ‘actuarial (losses)/gains arising from changes in financial assumptions’.
Put another way Carillion Plc’s (LSE: CLLN) previous risk assessment of potential losses under the pension scheme was found to be woefully inadequate and a review increased this risk by a large margin.
This increased risk was reflected on their balance sheet and represents a very real risk in the sense that the vast majority of assets are made up of intangibles and trade receivables that true value of which is far below what is stated on the balance sheet.
Net tangible asset value is negative.
As for the increase in trade payables the notes simply state increases in ‘trade payables’, ‘amounts owed to joint ventures’, ‘amounts owed to jointly controlled operations’ and ‘other creditors’ – not bad for an increase of £370 million in liabilities.
Why Buy Carillion Stock?
You would think by looking at the balance sheet alone that Carillion Plc (LSE: CLLN) is a bargepole stock and for most people it will be.
The Shares and Stock Markets Model Portfolio is awash with once unloved stocks that have now risen from the ashes.
Carillion Plc (LSE: CLLN) may or may not arise from the ashes and neither am I counting on it to, rather I’m buying into a business that has a lot of problems, is trying to resolve them and will eventually do so over long time period.
The strategic and operational review is already underway and further action has been announced to tackle its many balance sheet blues include:
The actions the Board put in place in March 2017 to reduce net borrowing have been accelerated and further actions are being taken to reduce net borrowing including:
· Disposals to exit non-core markets and geographies to raise up to a further £125m in the next 12 months.
· Further annual cost savings to be quantified as part of the strategic and operational review.
· Maximising the recovery of receivables.
· 2017 dividends suspended resulting in a cash saving of approximately £80m.
There is massive risk with this purchase which is based upon managements’ perceived ability to prevent Carillion Plc (LSE: CLLN) from falling into financial Armageddon and to actually see the financial benefits of moving away from risky contracts towards contracts in the support services sector.
I’m fully expecting the share price to decline further at which point I’d hope to have the discipline to buy more if the fundamentals are largely unchanged.
What do you think? Am I mad to step in at this point or should I have waited for the expected £500 million rights issue?