There is no shortage of reasons for why Carillion might be finding life tough at the moment — but the company’s interim results yesterday provided no reason to jump ship.
As a business that thrives on public sector contracts, it has suffered from an election slowdown, and things are unlikely to pick up until the Whitehall spending review concludes in the autumn. The government is its biggest customer, representing 36 per cent of revenue in the first half. Carillion cleans hospitals, maintains roads and earns dependable income from long-term public-private partnerships. So it is hardly surprising that the order book was down a touch from six months ago.
There have also been concerns that its Middle East construction business will feel the chill from $45 oil. Its first half was strong there, with revenue and profit racing away. Richard Howson, the chief executive, reckons that there is some softness in Oman, one of its four markets in the Middle East, but that in the UAE, Saudi Arabia and Qatar there is plenty of activity unrelated to the oil market, such as the 2022 World Cup (in Qatar) and Dubai’s preparations for the World Expo 2020. And he also reckons that the decline in the price of oil itself will create opportunities as oil companies look to cut costs, citing a maintenance and firefighting contract with Shell in Oman. Although Oman lacks the cash reserves of some of its peers to cushion the impact of lower oil prices, it is a less important part of Carillion’s business than it was last year, when it represented 45 per cent of Middle East revenues.
The interim dividend, lifted by 2 per cent to 5.7p a share, is more than twice covered by earnings and yielded 5.3 per cent last year. That is a payout not to be sniffed at, considering that a record 96 per cent of 2015 revenue is as good as in the bag.
The botched takeover attempt of Balfour Beatty last year suggests that Carillion’s management is still capable of jeopardising the steady, conservative progress with a rush of blood to the head — but there were few signs yesterday that the company was mulling another transformational acquisition. In this climate, steady as she goes is a winning strategy.
Advertisement
Revenue £2.26bn
Dividend 5.7p
MY ADVICE Hold
WHY A safe, high-yielding dividend and record revenue visibility provide a winning combination in times of uncertainty
Possibly unfairly, Cape’s shares are included in the oil services sector, which is ringing the alarm bells for investors because of the lowly price of the black stuff and worries about the commodities cycle.
In truth, the company is more than the sector tag describes, providing a range of services from scaffolding, pipework, painting and maintenance, and to petrochemical, mining and marine businesses, as well as to the big beasts of the oil and gas sector.
Advertisement
With its markets stretching from onshore and offshore Britain, the Middle East and North Africa to Asia Pacific, it is also expanding the range of services it provides, buying companies that get it into the building and maintenance of storage tanks and shell and tube heat exchangers.
In a better-than-expected set of half-year results yesterday, Cape posted a 4.2 per cent increase in pre-tax profits to £17.4 million on revenues up 13.2 per cent at £362.6 million for the six months to first week of July.
It highlighted an order book that stands at £800 million, which, with contracts stretching out as much as five years, gives investors good visibility on future earnings.
True, Cape has suffered from the falling oil price. Like its competitors, it has cut its cost base, something that should be reflected in its performance during the second half of the year.
The shares, which gained 15½p, or 7 per cent, to 228½p, trade on a multiple of about eight times forward earnings and yield 6.5 per cent. That makes them cheap, and worth having.
Advertisement
Revenue £363m
Profits £17.4m
MY ADVICE Buy long term
WHY Lowly priced, diversified growth story
Problems on North America’s buses continue to dog Stagecoach and to depress the transport operator’s shares. Its US bus unit reported a 5.3 per centfall in like-for-like revenues in the three months to the end of July, as cheap fuel means Americans have taken to their cars instead of using commercial operators. That includes trading at Megabus.com: before the oil price tanked, it was doing well for Stagecoach, owing to its larger coaches and good inter-city network.
Stagecoach is not alone: its British rivals FirstGroup, which operates Greyhound coaches, and National Express have also struggled in the US. With no sign of a bounce in oil, Stagecoach said in yesterday’s trading update that it was cutting its expectations for operating profits in the division. This casts a cloud over some of its prospects in the British rail market, where tenders for about half the network’s 20 franchises will come up for grabs during this parliament.
Advertisement
Here, it is looking well placed. It operates South West and East Midlands trains, and has the East Coast and West Coast franchises in joint ventures with Virgin. It is part of a consortium bidding to run trains in East Anglia. Wait until there is more clarity over earnings.
UK Bus (regional) like-for-like rev 1%
MY ADVICE Hold
WHY Uncertain earnings growth in the US, and UK rail
And finally . . .
Advertisement
Skyepharma is starting to make asthma pay. Strong sales of flutiform,its treatment for the condition, helped to send it back into profit at the half-year stage and put some serious pep into the shares, up 24¼p, or 9 per cent, to 291½p yesterday. Revenues rose by 19 per cent to £40.8 million over the six months to the end of June, driven by better than expected sales of flutiform, one of several drugs brought to market. A pre-tax loss of £18.1 million this time last year was turned into interim profits of £10.5 million this time around.
Follow me on Twitter for updates @milescostello