My previous post got to the essence of why Carillion’s share price got dump! That was due to the use of trade receivables, especially “other receivables” to bolster their sales and profits. They were hiding their failings from their acquisitions strategies. (Most of the losses came from their poor timing in acquiring Eaga, as solar tariff subsidies were getting cut).

Proof of this lies in Carillion poor operating cash conversion of 55%. Also, average borrowings have grown past £1bn from £127m in 2005, not to mention pension deficits of £800m+.


But, having seen Carillion’s market capitalisation collapse from £2bn to £243m in two years, are there hidden value, where investors could exploit?

Also, how will the Carillion’s saga COULD play out in the next 12 to 18 months? 


To do this, we need to value Carillion’s divisions.


Carillion’s Construction Division

Carillion’s construction divisions, especially their Middle-Eastern operations is the biggest source of “uncontrollable receivables growth.” While investors saw stable trade receivables, it was their other receivables, especially their Construction’s receivables rising from £192m in 2003 to £614.5m in 2016.

For the purpose of segment analysis, starting from 2009, receivables would have grown from £328.8m to £614.5m at the end of 2016. Meanwhile, Sales from the division, including their Middle East operations actually fell from £2,821.4m to £2,188.5m in that period.

Therefore, receivables, as a % of construction revenue rose from 11.7% to 28.1%.

Although Carillion’s construction has stated total net asset value of £395m. It would be wise if we were to assume zero value because receivables writedown would wipe out equity.



Now, that leaves us with one division.


Carillion’s Support Services

This is Carillion biggest division with 2016’s sales of £2.7bn. It also recorded operating earnings of £152m with net asset value of over £1.5bn.

Operating margins have improved from 3% to 5.6% with the return on segment assets at 7%.

This division is Carillion golden goose and buyers would attach 10 times multiple of EBIT or £1.52bn.


Putting it together


With a price of £1.52bn valuation for support services and zero value for their construction businesses. Carillion has net debt of £1bn, add in pension deficit of £800m it would give Carillion a negative net…

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