Carillion Share Discussion Threads

[jimbo44] 05/2/2017 10:34

Sure the shorting, pension deficit and high debt level are issues but for now the company appears sound. I feel that the share price is getting low enough. There is a well covered excellent yield and unless bad news comes out there is no reason to think the dividend will be meaningfully cut. If the share price slips further the yield will just go up making this even more attractive to some investors. Maybe a point will be reached when the yield temptation will exceed the perceived risks and some serious buying take place. I would suggest that this does not have to be too great for the share price to rise significantly which might put pressure on the shorters and then? This is probably naïve wishful thinking but for me it is enough to encourage increasing my holding taking the view that if the shorters start to close there could be a big reward for staying the distance with the bonus of a yield that is currently beating inflation 4x.

[jaf1948] 03/2/2017 16:34

I wrote an essay on shorting nearly 50 years ago when I was at university. I can't remember what I wrote but I know I wasn't complimentary about the practice even then. There were lots of diagrams showing how shorting a stock can smooth out the peaks and troughs but I remember thinking that shorters are not at all interested in the good of the company they are buying into - I think I even used the term 'anti-investors' which didn't exist then or now - and are only interested in seeing the company do badly.

Nothing I have witnessed since then has changed my mind.

[kcsham] 03/2/2017 16:31

JAF -absolutely!K C

[rcturner2] 03/2/2017 16:17

lol I though the other side were supposed to be the paranoid ones?

[jaf1948] 03/2/2017 16:16

RCT, Shorting is always negative IMO. If I were Ruler of the Universe, I would ban it totally.

kcsham, There are also many people on bulletin boards who get paid to talk up or talk down particular shares.

[kcsham] 03/2/2017 15:51

JAF - Many years ago, someone told me that there are a lot of people being paid to talk down a particular share and their master are known as shorters. What is a coincidence. KC

[ch1ck] 03/2/2017 15:45

I love paranoia I made a lot of money from other peoples.

[rcturner2] 03/2/2017 15:43

In your view JAF, is the shorting a negative factor of any weight or not?

[jaf1948] 03/2/2017 15:29

If you think, after looking at the available figures and doing your own research, that the only reason not to buy CLLN is because the shorters must know something that the rest of us don't, then it's down to your level of paranoia whether you go ahead or not.

[ch1ck] 03/2/2017 15:21

I topped up this morning saw the news and the fall in share price and thought thats a bargin.I cant see why this is so low. Its gona bounce from here I am convinced.

[pogue] 03/2/2017 14:48

Good man Kiwihope you know it makes sense :0)

[kiwihope] 03/2/2017 13:29

Oh what the hell ... just bought a few more!

[kiwihope] 03/2/2017 13:14

Hi pogue,

No, the level of shorting seems high, certainly compared to Kier and Interserve who have virtually none. But these things are not linear. They are all to do with investors perceptions of risk, animal spirits and the like, and you can get the camel-straw-back affect where a small change in input can cause a much larger change in output.

I am really uncertain about Carillion. Part of me looks at it and thinks, these are the golden opportunities you wait for when unjustified doom and gloom presents bargains. But another part says, are the concerns justified?

Comparing Carillion with Kier shows up financial differences but not as much as you would expect by the difference in share price. They seem pretty similar companies. Bothe have sales of £4-4.5bn (CLLN a little higher). CLLN has a bit higher margins giving £235m underlying operating profit (KIE is £150M). And yet CLLN has an EV of only £1.1bn vs £1.5B for KIE. So on that basis you can buy CLLN for 27% less but get 57% more profit.

KIE has less debt - it's hard to be sure but roughly KIE pays about £25m in finance costs pa. and CLLN pays about £52m. The difference is 2x but, CLLN makes a bit more profit. But I think it's pretty clear that CLLN has significantly more net debt that KIE.

The pension deficit is also hard to weigh up as it depends upon bond yields and CLLN and KIE have different year ends. But looking at what they pay into their pension funds, CLLN pays about 2x what KIE does. I don't know if I'm comparing apples with apples but on the face of it CLLN has a deficit of about £300m while KIE's is only £75m or so. I'm a bit confused but what we can say again, is that CLLN has a significantly larger pension deficit.

So here's the choice. Ignoring the shorters (because they can't make CLLN go out of business), if you believe CLLN's debt and pension deficit is manageable, then at the present market cap, the shares are a bargain.

[daveofdevon] 03/2/2017 13:13

Forgive me for being a party pooper but I do feel that the shorting topic has been talked to death

[speedsgh] 03/2/2017 13:08

pogue/JAF/et al - This FT article from Oct 2015 sums it all up pretty well imo & confirms that the timing of the increase in shorting was not coincidental to the convertible bond issue (it also does not suggest in any way that the shorting is being done by the bondholders). The bond issue appears to have been the trigger for making the hedge funds/shorters take a closer look at the company...

Carillion draws short sellers’ attention (12/10/2015) -

Carillion has become the most popular share for hedge funds to “sell short” in the London market, according to official data, as analysts question the support services group’s lack of growth — and rising debt.

Substantial bets that Carillion’s share price will fall have been disclosed by 14 funds, and figures from Markit show that more than a quarter of the company’s shares have been borrowed by speculators hoping to sell them and buy them back more cheaply, to make a potential profit.

Carillion declined to comment. Some of the funds said the Wolverhampton-based group came to their attention last December — following an unsuccessful attempt to merge with larger rival Balfour Beatty — when it announced it would raise £170m by issuing a convertible bond. Seeking capital so close to the end of the year surprised the market, and led some investors to take a closer look at the company’s balance sheet.

In August of this year, the company — which employs 40,000 people in the UK, US, Middle East and Africa — reported flat pre-tax half-year profits, and said it had £17bn of orders in its pipeline.

But last week Andrew Gibb, analyst at Investec, told clients: “Carillion remains an enigma. On the one hand, it looks a cheap stock with one of the biggest dividend yields in the sector; on the other, it carries one of the biggest short positions in the market.” He claimed that “concerns centre on the increasing average debt position and absence of underlying profit growth over the past few years”.

Some of these concerns have stemmed from the ways in which companies can control the way their financial strength is presented.

At both the end of December and the end of June, when financial metrics are typically tested by lenders, Carillion reported a net debt figure of less than £200m. However, the company also disclosed that its average net borrowing between the two dates was far higher, at £487m.

Some investors have also pointed to the way Carillion has used a scheme designed to help small businesses receive payment faster in order to delay the timing of its own payments, providing a temporary boost to cash flow.

At the same time Carillion is owed £1.5bn by its customers — a total that has been growing faster than reported revenues and represents a larger proportion of sales than for peers, investors noted.

In recent years, other support services groups including Balfour Beatty and Serco have run into trouble when the cost of servicing their long-term contracts has proved larger than anticipated. Balfour and Serco are both trying to rebuild their businesses under new management.

Carillion is next due to update the market with a trading statement on December 9.

Investors must disclose short positions greater than 0.5 per cent of a UK listed company. The next most popular short targets after Carillion are WM Morrison, the supermarket group with 11 disclosed positions, and peer Sainsbury, with ten.

[pogue] 03/2/2017 12:39

kiwihope do you think the debt and pension numbers are particularity large to justify the level of shorting and by that the share price? I think that is debate.
IMHO There looks like a good opportunity here to buy shares at artificially depressed levels that look too good to be true.

[8w] 03/2/2017 12:14

My head is spinning all these posts on a normally quietish thread. I may as well add my thoughts because I don't think it has been mentioned.

Short positions are part of a portfolio. Hedging to be making a profit, or a smaller loss on the portfolio as a whole

I have run a long/short portfolio myself and I would be looking at the bottom line before considering the individual components. Hence it is difficult to consider the shorters holding in CLLN without knowing their bigger picture.

For the record I am long Carillon . They are a great share for trading and income. Needless to say I am currently accumulating.

[spoole5] 03/2/2017 11:52

And interserve who have a serious problem with their Glasgow waste contract to deal with. Carillon are a well run company, there are far worse out there who don't seem to get the shorters attention.

[kiwihope] 03/2/2017 11:50

Hi lab,

I agree the short interest has a negative effect on sentiment and is self-fulfilling. So it has some effect on price. But I am just saying you have got the chicken and egg the wrong way around.

In terms of the share price shorters are just sellers. I don't think they have any more direct effect on the price than a long holder selling. All that is different is that they want the price to fall.

You are wrong that the shorters all acted together at the same time. If you look at the % short interest it was 5% in Jan 2015 and rose steadily to 18% over 2015. It has then wobbled a bit but the trend was still increasing over 2016 to about 23% where we are today.

It worries me that you don't even see the risks. Debt and pension deficits aren't excuses ... they are reasons.

You have to remember I am a long-term holder here, so the last thing I want is for the price to languish at these levels, or go even lower. But that doesn't make me blind to the risks and stop me trying to understand why this is happening.

[lonrho] 03/2/2017 11:46

Its difficult to see why Kier has a market cap approx 50% above Carillion as it has lower margins lower operating profits and also has relatively high average debt and a gross pension fund obligation of £1.6 billion.Either Kier is too high or Carillion too low on known current facts with Kier on a prospective p/e of 13 and Carillion approximately half that.

[essentialinvestor] 03/2/2017 11:43

PE does not give an insight to valuation here imv.

You need to look at a broader valuation that attempts to take account of net debt
and the pension deficit.

If you still consider the valuation attractive on that basis fair enough,
PE should not be referenced re CLLN as an accurate valuation metric imo.

[spoole5] 03/2/2017 11:39

This company should be attractive to private equity. Take over then pay down debt for 3 or 4 years, get the pension deficit under control then refloat a much cleaner company which would command a higher rating.

[lab305] 03/2/2017 11:37

kiwihope -Wrong. To suggest that the short position is not responsible in large part for the ridiculously low share price is completely incorrect. The negative effect of this massive 22% short upon sentiment towards the stock is obvious . How many articles have you read over the last year with titles such as The most unloved stocks etc. Clln always comes out top. Of late there has been a direct correlation between the falling share price and increasing short position.
I have said it many times but once again , if they knew something 2 years ago it would have surfaced by now , and how come they all acted together at the same time ? Also how did they (at least 14 of them) know something that escaped the rest of us ?

I am afraid that excuses about pension defecits and debt just won't wash . To push a well run company to a PE of around 7 on rumours and speculation is unheard of.
The short sellers have legally made millions out of trashing this company and done an incredible job , however one day they will have to buy some back and there is not much liquidity in the stock.
There is a new finance director in place now so perhaps it may not be too long before we see a change of direction.

[jaf1948] 03/2/2017 11:08

'If Carillion had lower debt, a smaller pension deficit, was not in the low margin construction/service sector....'

it would be called Apple and we'd all be millionaires.