Carillion plc’s (LON:CLLN) chief executive Richard Howson has stepped down after the UK construction and support services firm warned full year revenue would be lower than expected.
Shares plunged 34.46% to 125.90p in early trading.
Howson leaves with immediate effect after two years as boss but will remain at the company to support with the transition. Former chief executive of The Weir Group, Keith Cochrane, will fill Howson’s role in the interim until a permanent successor is found.
Howson’s departure was announced at the same time as the company said its overall performance was expected to be below management's previous estimates.
Carillion lowered its revenue guidance to between £4.8bn and £5bn from a previous estimate of just over £5bn, blaming “difficult” markets and withdrawals from certain territories, including Qatar, the Kingdom of Saudi Arabia and Egypt.
The dividend for 2017 was also suspended, which Carillion said will provide a cash saving of about £80mln.
READ:Carillion slumps as construction firm reports fall in full year pre-tax profits
Carillion to kick off comprehensive review
The company said it was undertaking a “comprehensive review of the business and the capital structure”.
The group saw deterioration in cash flows on some construction contracts, which led to a provision of £845mln following a review. Of this provision, £375mln related to the UK - including three public-private partnership projects - and £470mln to overseas markets, a majority of which related to exiting markets in the Middle East and Canada.
Associated future net cash outflows in respect of these contracts is between £100mln and £150mln, mainly in 2017 and 2018.
Net borrowing increases as cash flows deteriorate
First half average net borrowing is expected to be £695mln, compared to £586.5mln in fiscal year 2016, reflecting a decline in cash flows on construction contracts and working capital outflows after a higher-than-average number of contracts were completed and not replaced by new ones.
“Despite making progress against the strategic priorities we set out in our 2016 results announcement in March, average net borrowing has increased above the level we expected, which means that we will no longer be able to meet our target of reducing leverage for the full year,” said chairman Philip Green.
"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.”
Liberum downgrades Carillion after revenue warning
Liberum changed its recommendation on the stock to 'not rated' from 'hold' and put the target price under review as it cut its revenue forecast to £4.9bn from £5.1bn. The broker slashed its forecast for annual fully diluted earnings per share by 27% to 25.6p and said it assumes no dividend.
The broker also raised its average net debt estimate to £800mln from £575mln, with about a £70mln adverse impact from the provisions in the year.
"Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in Construction, we believe that Carillion will need to raise a significant amount of more money," Liberum said.
Significant rights issue could be on the horizon for Carillion, says Hargreaves Lansdown
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said debt is continuing to climb at an increasing rate while the construction business seems to be hitting one hurdle after another.
“Carillion looks like it’s trying to bail out a supertanker with a soup spoon," Hyett said.
"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.”