Carillion Share Discussion Threads

[jonwig] 15/5/2017 12:07

Hyden - have you read (dated 4 May) ...

A sharp slowdown in the improvement to life expectancy could wipe £310bn from the pension deficits of thousands of UK companies with final salary schemes, according to new estimates by PwC.

“In the first decade of this century, there was a clear trend for improvements in life expectancy,” said Raj Mody, global head of pensions with PwC, the professional services firm.

“Pension funds have typically been assuming this trend will continue when forecasting deficits. But over the last five years, that trend has changed and there is a growing view that it is not just a ‘blip’.”

If pension schemes were previously assuming that a 40-year-old man lives to 90, but that could end up being 84, you would look at current deficits in a different light:

Mr Mody said the slowing improvement could cut £310bn from the aggregate £530bn funding shortfall that currently exists for the UK’s DB schemes.

[hyden] 15/5/2017 12:02

Next update is 11th July, I believe, so the more cautious might prefer to wait until then before making a decision to invest. I remain of the view that this is high risk and warrants just a small position but I am tempted.

[hyden] 15/5/2017 11:59

Thanks Valhamos. It seems to me that confusion amongst posters might be due to the fact that derivative hedging arrangements are accounted separate to the actual movement in net debt. That is to say that the apparent increase in net debt triggered by a worsening of the exchange rate is treated as a cash charge and shows on the cash flow statement (which makes sense) but the increase in value of the derivate contract is a non-cash charge and is treated as an exceptional gain (which also makes sense). So, other things being equal, an improvement in the exchange rate would lead to a decrease in net debt and a similar exceptional loss on the derivative contract. What we should also consider, imo, is that the worsening exchange rate will also flatter foreign profits so provided the debt is balanced in line with the geographical spread of the business then it matters less that net debt is "apparently" increasing.

I guess the other risk hurting the share price is the pensions schemes deficit which currently stands at £805m (£663m after tax) and which has more than doubled over the past 12 months. Note that the tri-annual valuation is currently in progress which may alter this figure. As far as I can see, the increase is largely down to a reduction in the discount rate as well as a slight increase in the assumption for future inflation. Now, since agreement was reached back in 2014 over funding arrangements (if required, deficit recovery payments can continue until 2029), short term changes in financial assumptions matter less as they tend to average out over the longer term, imo.

All things considered, I do not think these risks justify such a fall in the share price and I am becoming more persuaded that the stock is oversold.

[valhamos] 15/5/2017 09:33

edmundshaw

You expressed surprise that the company was "that exposed". What do you mean by that and how do you explain that rather than some large forex loss in 2016 in the P&L there was actually a small gain of £7.4m (note 3)?

The point is that foreign currency denominated borrowing is largely hedged and therefore there is little in the way of P&L impact from forex movement. This is made particularly clear as regards the private placement notes on page 47.

"The Group hedges all significant currency transaction exposures using
foreign exchange risk management techniques....


The Group’s US dollar denominated private placement financing is hedged using
cross-currency derivatives, which effectively fix the interest cost and capital
repayments at the exchange rates prevailing at the time the financing was
secured in 2013."

[jonwig] 15/5/2017 08:58

Thanks for the recent contributions to this thread. (I haven't read back far, though!)

Regarding the dividend, it looks as though their intention is to manintain/increase this as a priority. The 2016 AR "Dividend Policy" (p43) explains how they treat the holding company as an investor in the operating companies and which has built up distributable reserves. I guess they would draw on these as a first resort.

So they seem confident that their rebalancing (of contracts) policy will reduce debt. It would take new management to do drastic things at this stage (dividend cut or rights issue). So it's a tug-of-war for investors vs shorters.

[wallywoo] 15/5/2017 08:56

Sold out for a small loss, good luck to existing holders

[staylow2] 15/5/2017 08:42

Another increase on shorttracker.

[edmundshaw] 15/5/2017 08:33

Hedged "to at least 60% of the net asset value" does not mean exposures are matched, simply reduced.

[valhamos] 14/5/2017 22:32

"without forex losses, avg net debt would have fallen"

But as I've pointed out the debt is hedged. The increase in debt because of forex is matched by a gain in derivatives for the private placement finance or a gain in the underlying net assets denominated in foreign currency. It's all in the 2016 accounts particularly note 26.

[edmundshaw] 14/5/2017 21:43

Not entirely hedged. It is a point I'd like to ask the company when I get the chance... as Hyden points out (thanks guys for reading p46), without forex losses, avg net debt would have fallen. I am a bit surprised the company was that exposed TBH.

[valhamos] 14/5/2017 19:35

jonwig

"I have to admit my research is inadequate as yet. Presumably they are fully exposed to forex?"

No they are mostly hedged - see my previous post 4133

To be exact, from note 26 of the 2016 report:

"In order to protect the Group’s balance sheet from the impact of foreign exchange rate volatility, the Group’s policy is that foreign currency denominated net assets that exceed £10 million equivalent are hedged, as a minimum, to at least 60 per cent of the net asset value"

Of the £353m foreign currency borrowing £89m is used to hedge these foreign currency net assets and £225m is US dollar denominated private placement finance which is hedged using currency derivatives effectively fixing the interest cost and capital repayments at 2013 exchange rates.

[hyden] 14/5/2017 15:42

I don't think a Rights Issue is required but I agree a temporary dividend suspension would make an immediate positive impact on net debt and might trigger a short squeeze.

I don't know what hedging arrangements are in place as I haven't done that much research yet. I have a very small position here but I do think the company warrants further consideration as I believe the dividend is affordable in conjunction with a more gradual reduction in net debt. It's certainly got me thinking and emailing my friends and acquaintances.

The share price has fallen some 33% over 12 months or so and I think it is now oversold but admittedly still high risk.

[jonwig] 14/5/2017 15:20

The divi costs £80m pa.

I must confess that I'm talking here as a potential short-term trader and not a long-term value investor. From my pov, therefore, a divi suspension would probably lead to a short squeeze before income funds made decisions, whilst a RI would be an immediate downer.

Hyden - I have to admit my research is inadequate as yet. Presumably they are fully exposed to forex?

[hyden] 14/5/2017 14:38

P46 of the annual report also states "The Group therefore continues to have substantial funding to support our strategy over the medium term, while at the same time reducing average net borrowing."

Looking at the cashflow statement, pension fund contributions total c. £47m Vs cash generated of some £277m. Easily affordable imo, together with the interest charge and the dividend. A large chunk of cash outflow seems to be down to foreign exchange movements (£68m Vs £8m in the prior year), which is one-off imo and more than accounts for the increase in net debt.

[edmundshaw] 14/5/2017 14:19

It's true, if bond rates turn negative and the rules for pension funding are left unchanged, there will be an issue. However, most people are expecting bond rates to recover... sometime...

[spoole5] 14/5/2017 11:02

It will take more than a halving or suspension of the dividend to deal with the pension deficit and the debt, it will take a rights issue.

[edmundshaw] 14/5/2017 11:00

Average net debt went up last year from £539m to £586m.

Just to check, is everyone here aware of why that is? And more importantly, can we extrapolate where it is likely to go in the future?

Yes it is true that halving the dividend would wipe out that rise in debt; but is it really necessary?

Hint: P46 of the Annual Report...

[rcturner2] 14/5/2017 10:59

Berkeley did an interesting thing to see off the shorters. They basically said they will return x amount to shareholders per year and used some of that for buybacks and the remainder for the dividend.

[jonwig] 14/5/2017 09:57

RCT -

Debt - no choice, pay it down
Pension - contractual payments, again no choice. (If gilt yields rise enough, the pension fund would cease to be a worry!)
Dividend - just suspend it for a year, maybe two. I think quite a few companies might follow the example of TalkTalk here!

If the did the last, I might even be a buyer, and wouldn't be alone, I'm sure.

[rcturner2] 14/5/2017 09:16

Remember that profit is decreasing here (down 5% in last finals) on extremely thin margins. They need to generate sufficient cash to pay the dividend, pay the debt interest and pay into the pension fund (which has a large deficit). If things get too tight, which do you think is going to give way first?

[staylow2] 14/5/2017 08:38

*would bid forShould it be true

[staylow2] 14/5/2017 08:37

Sunday Times, "May pledges council house revolution"Would the service contract something Carillon will bid for?

[poacher45] 13/5/2017 09:42

Step up to the plate Warren Buffet you know it is a big company with plenty of assets it just needs good management.

[haywards26] 13/5/2017 09:40

The directors are in place to run the business not the share price poacher...

[poacher45] 13/5/2017 09:39

Candid investor you are worried that after 4 months of the current year they have only got just over 85% of the turnover that they need for the whole of the year. I think a lot of companies would be more than happy with that position.