Carillion shares are the most shorted on the London market, accounting for about a fifth of the stock. Many of those with short positions are US hedge funds and their main concern is that the company does not have the financial firepower to cope with its day-to-day needs and the sums required to start on new support-services contracts.
They are watching for a replay of the collapse of Balfour Beatty, a not dissimilar business. Some will therefore be feeling a bit nervous. In November the company renewed its main banking facility on more favourable terms and extended its maturity date to the end of 2020. This left Carillion with £1.4 billion of funds available. The shares, as the graph shows, kept falling but then recovered.
They climbed another 11¾p to 291p on some reassuring 2015 numbers. Its Middle East construction business is stable despite the oil-related downturn in spending. Margins in support services are running at 5.8 per cent, down a bit because of the need to spend on preparing for new work but satisfactory enough.
Profits from its other construction businesses are down, but this reflects some normalisation of margins after a one-off boost that came from exiting earlier a lot of less profitable business.
The public-private partnership side contributed an extra £37 million in profits as four projects were completed and sold but another four were won, two in Canada. In addition, Carillion is in talks to extend that business into healthcare in the Gulf.
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The workload is strong, both in hand and in future. There was an inevitable hiccup from the general election, which postponed decisions in the public sector and private, but the second half picked up strongly.
Dividends are up again, by 3 per cent — the payment has risen in each of the 15 years since the company was created out of Tarmac. This gives a yield of 6.6 per cent, among the highest in the sector and a level that might give rise to fears of a cut, except that it is well covered.
The shares sell on about 8.5 times this year’s earnings, while the market is expecting a bounce in 2017 as that new work comes through. Unless you believe that disaster is looming on the balance sheet, the yield means that you are being paid to await that upturn.
Revenue £4.6bn | Dividends 18.25p
MY ADVICE Buy long term
WHY The key to the future performance is how the pipeline of work is stacking up and the balance sheet; both appear strong enough
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Cobham
These are not markets in which you want to miss a profit forecast. On November 5, Cobham warned that earnings per share this year would come in at the bottom of a range of 20.1p to 21.7p for 2015. They duly arrived at 19.5p. This is not a huge miss but the shares, under pressure since the start of December but starting to recover, fell another 19¾p to 239¾p.
The reason for the miss was a further deterioration in several markets Cobham serves and a small technical undershoot because of a couple of disposals. The marine side is depressed because of a fall in shipping, telecoms networks providers are slow in taking up new product and there are fewer flights around Australia because of the low price of commodities.
There were a couple of other niggles. Cashflow is down because of that slowdown in orders, while this year there will be flattish revenues and stable margins. That would at least be an improvement on 2015’s 1 per cent fall in organic revenues, an outcome that was not so bad given those slowing markets.
Profits before tax were up by 9 per cent to £280 million, though this was flattered by the non-recurrence of some provisions last time. Some of those lost orders from telecoms providers will come through but the commercial side, where revenues fell 6 per cent last year, will stay under pressure. Against that, geopolitical concerns will mean continued strong demand for missile control systems.
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Cobham shares, after downgrades, sell on about 13 times earnings. That seems a fair valuation.
Group order intake 13%
MY ADVICE Avoid for now
WHY Progress this year is likely to be slow
Melrose
Buying Melrose shares at the moment is the perfect case of buying a pig in a poke — except that the pig, in the past, has turned out to be a well-fed animal with plenty of meat to go around. Melrose operates a quasi-private equity model whereby you invest for the benefits from whatever underperforming engineering companies it can buy, buff up and sell at a big profit.
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The last sale, of the Elster metering business, took place conveniently as the 2015 financial year closed, the last cash return after that. Melrose is left with Brush, a turbogenerator maker weathering tough markets and at this stage in the cycle not to be sold, no debt, no great pension fund burden and in an ideal position to do the next deal. Given the state of stock markets, any seller of the appropriate firm will not be looking at an IPO and should be offering a decent price.
Melrose therefore offers investors an interesting choice. With that cash return in the bag and the share price, up ¾p at 335½p, well ahead since the start of the year as institutions have been piling in ahead of the next deal, they could take some profits. Alternatively, they could buy before that next deal.
Elster sale to Honeywell £3.3bn
MY ADVICE Buy
WHY Record of doing deals speaks for itself
And finally...
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H &T, the quoted pawnbroker, has benefited from the forced withdrawal of some competitors in the short-term credit market from the high street, its own estimates suggesting that a third of all outlets run by the big operators have closed since the end of 2013. Figures for last year suggest the pawnbroking side has stabilised at least, even if it is a way off its peak. The pledge book, the value of loans, is steady, halting an earlier decline. The company is moving in a small way into personal loans and foreign exchange transactions.
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