Carillion plc (LON:CLLN) shares continued to slump today following a grim trading update, with UBS repeating a ‘sell’ rating on the stock and cutting its target price to 78p from 185p.
The UK construction and support services firm yesterday warned full year revenue would be lower than previously expected as it booked a £845mln provision after a deterioration of cash flows on some contracts.
READ: Carillion shares plunge as it warns on full year revenue and chief executive departs
The company also suspended its dividend and raised its debt forecast for the year. Chief executive Richard Howson has decided to walk out the door with former Weir Group boss, Keith Cochrane, filling in temporarily until the group finds a permanent replacement.
Cochrane will lead a comprehensive review of the business and capital structure.
Possible re-capitalisation for Carillion in focus
UBS said: “Following the £845mln contract provision, dividend suspension and CEO departure, the debate now moves on how Carillion can successfully re-capitalise itself.”
The bank said after the company’s strategic review, options could include raising fresh equity, creditors converting debt to equity, asset disposals or a combination of the three.
However, UBS believes asset sales could hit earnings and potentially impact residual value to shareholders depending on the offers the company receives.
UBS looks at the potential positives for Carillion
On the upside, possible positive outcomes could include a recovery of legacy receivables and disposals above the bank’s implied some-of-parts (SOP) valuation, UBS said.
“Given high gearing of Carillion, volatility will remain high. However, considering (1) underlying earnings downgrades of c30% and (2) integrating current balance sheet position, we derive a 78p SOP fair value,” UBS said.
It added: “Despite the significant share price decline (-50% year-to-date) we continue to see downside, but recognise the low equity value relative to enterprise value making valuation inherently volatile.”
Carillion's balance sheet unsustainable, says Morgan Stanley
Morgan Stanley has also weighed in on the trading update, saying it thinks Carillion's contract accounting and balancesheet structure are "unsustainable". The broker said the first step will be to improve the perception of risk, but "much more will be required, we believe, to stabilise the business".
"While the provisions de-risk the specific contracts to some extent, a continuing contract review and a new CEO suggest that further write-downs are possible," it added.
Shares fell 15.03% to 99.50 in morning trading.
Mike van Dulken, head of research at Accendo Markets, said shares are trading at levels not seen since late October 2000.
"After yesterday’s 39% drop, this takes the declines to 48% in less than two sessions. Investors (both those nursing losses and those circling for a bargain) are understandably asking where the next levels of support are."
He said it was still early days in terms of the capital structure review, which could result in a highly dilutive rights issue to reduce debt and shore up the balance sheet.
"Hedge funds have already done well by shorting the stock in anticipation of corporate troubles," Van Dulken said. "However, they may decide to stay the course seeing these financial woes (financial stress, profits warning, dividend suspension, CEO departure) having legs, and expecting the above-mentioned remedial work to take the shares even lower."