Carillion CEO falls on sword as dividend suspended over profit warning

Carillion's chief executive has resigned as the construction support services company suspended its 2017 dividend and promised to carry out a strategic review as it warned profits would be lower and debt higher than expected.

Due to cash flows dwindling as construction contracts dry up, first-half average net borrowing at the FTSE 250 company is now expected to be more than £100m higher than last year at £695m, with the board now forced to accelerate the restructuring of the business to slash costs and preserve cash.

Suspending the dividend will save around £80m, with around a further £125m will raised by selling off businesses in non-core markets and geographies over the next 12 months, while further cost savings will be sought as part of the strategic and operational review.

As full year guidance for revenue was cut to £4.8-£5bn and overall performance now expected to be below management's previous expectations, CEO Richard Howson has stepped down with immediate effect and the role filled on an interim basis by non-executive director Keith Cochrane, ex boss of Weir, amid the hunt for a permanent replacement. The managing director of the UK building unit has also walks, along with finance chiefs of three other business units.

In March when the company announced its annual results, chairman Philip Green had said Carillion was accelerating the rebalancing of the business "into markets and sectors where we can win high-quality contracts and achieve our targets for margin and cash flows, while actively managing the positions we have in challenging markets" and would "begin reducing average net borrowing by stepping up our ongoing cost reduction programmes and our focus on managing working capital".

On Monday he said that despite making progress against the priorities set out in March, average net borrowing had increased above the level expected, meaning it will not be able to reduce leverage for the full year.

"We have therefore concluded that we must take immediate action to accelerate the reduction in average net borrowing and are announcing a comprehensive programme of measures to address that, aimed at generating significant cashflow in the short-term," Green said.

"In addition, we are also announcing that we are undertaking a thorough review of the business and the capital structure, and the options available to optimise value for the benefit of shareholders. We will update the market on the progress of the review at our interim results in September."

The origin of the profit warning was blamed on the phasing of public private partnership (PPP) equity disposals, which are now expected to be in the second half, as the board pointed to strong contract wins elsewhere, with £2.6bn of new work secured in the half.

Although Green's initial review mentioned in March had seen cost cutting begin with the disposal of 50% interest in business in Oman for £12.8m cash, the deterioration in cash flows on several construction contracts called for an 'enhanced review' of all material contracts by new finance director Zafar Khan that has led the board to decide to exit UK construction PPP projects and exit from construction markets in Qatar, Saudi Arabia and Egypt and only undertake future construction work "on a highly selective basis and via lower-risk procurement".

Khan's review threw up a huge £845m contract provision as of 30 June 2017, of which £375m relates mostly to three UK PPP projects and £470m to overseas markets, the majority of which relates to exiting markets in the Middle East and Canada.

Having previously expected a cash receipt of £730m from these contracts, now a future net cash outflows of £100-150m is predicted, primarily in 2017 and 2018.

Shares in Carillion fell around 38% initially on Monday to below 120p - a level last seen almost 13 years ago.

Broker N+1Singer's Jamie Constable, who pointed out that the company also has a £587m pension deficit, said: "In conclusion it’s hard to see how they can get away without a rescue rights to rebuild the balance sheet. The problems appear to be endemic in the business so culture needs to change too.

"Keith Cochrane was only appointed interim CEO yesterday so could there be more to come out in due course? I have yet to find a number for the gross debt either. At 133p the equity market cap is £575m illustrating the depth of the hole they are in."

Analyst Nicholas Hyett at Hargreaves Lansdown said Carillion "looks like it’s trying to bail out a supertanker with a soup spoon" as debt continues to climb at an increasing rate, while the construction business seems to be hitting one hurdle after another.

"Judging by this announcement, the board are prepared to do everything it takes in order to save the ship. But talk of a review of capital structure, and the ongoing debt problem, will leave investors worried that a significant rights issue could be on the horizon."