Trading Statement

RNS Number : 9410O

Carillion PLC

07 July 2010

 



7 JULY 2010              

CARILLION PLC

TRADING UPDATE

GROUP PERFORMING WELL WITH EARNINGS GROWING IN LINE WITH EXPECTATIONS

Carillion, one of the UK's leading support services companies, is providing this update on trading in the first six months of 2010 ahead of announcing its interim results on 26 August 2010.

Highlights

·      Group continues to perform well - underlying earnings⁽¹⁾ expected to increase, more than offsetting the effects of disposing of non-core businesses and of selling investments in Public Private Partnership projects, which made significant contributions to the corresponding period in 2009.    

·      Balance sheet remains robust - expect to maintain a positive net cash position at the half year (December 2009: £24.9 million).

·      Support services, which contributes more than half of the Group's underlying operating profit, continues to perform in line with expectations - margins improving and on track to achieve our full-year margin target of around five per cent.  

·      Investments in Public Private Partnership projects continue to generate substantial value - in the first half, four new projects, in which we will invest around £69m of equity, were added to our portfolio, and one project was sold generating proceeds of £31.3 million, at a discount rate of some 7 per cent.

·      Middle East construction services performing in line with expectations - we continue to expect revenue and profit to be second half weighted, due to the timing of project starts and completions, with first half margins expected to be significantly ahead of our original target, and close to the 2009 level of 7.7%.

·      Construction services (excluding the Middle East) performing satisfactorily - revenue growth in Canada is expected to more than offset the planned reduction in UK revenue. 

·      97% revenue visibility for 2010.  

·      UK Government's Emergency Budget in line with our expectations - potential to create medium term growth opportunities in support services.

Business performance

In the first six months of 2010, the Group has continued to perform well despite market conditions remaining challenging.  Underlying earnings⁽¹⁾ per share are expected to increase, more than offsetting the effects of disposing of two non-core businesses - Enviros and IT services - and the sale of four investments in Public Private Partnership projects in 2009, which contributed some £14 million of profit in the first half of that year.  As indicated when we announced our 2009 preliminary results in March 2010, first-half revenue in 2010 will be lower than in the corresponding period in 2009, primarily as a result of the business disposals and equity sales made in 2009, the timing of project starts and completions in the Middle East and the effect of focusing on margins rather than revenue.   

Underlying cash flow from operations continues to be strong and is again expected to exceed underlying profit from operations.  Consequently, the Group expects to maintain a positive net cash position at 30 June 2010.  

Future revenue visibility remains strong, with some 97 per cent of expected full-year revenue in 2010 covered by the order book and probable orders.  The value of our order book and probable orders at the half year is expected to be similar to that at 31 December 2009 (£19.7 billion), despite the sale of our equity investment in the Queen Alexandra Hospital Public Private Partnership project, which reduced the value of our order book by some £0.5 billion.  In addition only £0.5 billion of the £19.7 billion is expected to relate to probable orders from the public sector, making us resilient to any potential UK Government cuts in this area.  We anticipate that the UK Government's recent announcement concerning the Building Schools for the Future programme will not have a material impact on the Group's order book and probable orders.

  Financial reporting segments

  Support services

Support services continues to perform in line with expectations and will again contribute over half of the Group's underlying operating profit.  As expected, first-half revenue will be lower, reflecting the disposal of non-core businesses in 2009 and our focus on margins rather than revenue.  As we continue to benefit from ongoing cost reduction, margins in this segment are expected to improve and offset the effects on profit of the non-core business disposals and maintain operating profit at a broadly similar level to that achieved in the corresponding period in 2009.      

We continue to have a strong order book of long-term contracts in this segment, which provides very good revenue visibility. In addition, we continue to have a large pipeline of contract opportunities, as both public and private sector organisations seek to reduce costs by outsourcing facilities management and other non-core services.  Furthermore, as we move through 2011 and into 2012 we expect to benefit from an acceleration in outsourcing by central and local government organisations as they come under increasing pressure to achieve the 25 per cent reduction in spending announced in the UK Government's Emergency Budget on 22 June 2010.  

In the second half of the year we expect to make further progress, as we continue to target a full-year operating margin

of around five per cent in order to offset the full-year effects of the non-core business disposals made in 2009.

Public Private Partnership (PPP) projects

Our portfolio of investments in PPP projects continues to generate substantial value for the Group.  During the first half,

Carillion Joint Ventures achieved financial close on four further projects - Southmead Hospital in Bristol, the Rochdale

and Wolverhampton Building Schools for the Future programmes and the Forensic Services and Coroner's Complex in

Toronto - in which we expect to invest around £69 million of equity, the majority of which will be invested when the

construction phase of these projects is complete. 

In June, we sold our investment in Queen Alexandra Hospital, Portsmouth for £31.3 million, which reflected a seven per cent discount rate. 

At 30 June 2010, we had a portfolio of 26 financially closed projects in which we had invested some £55 million.  The Directors' valuation of this portfolio at the half year is expected to be approximately £141 million, based on discounting, at nine per cent, the costs of the investments still to be made and the cash flows we expect to receive from all our investments.      

At the half year, Carillion Joint Ventures were shortlisted for a further five projects in which Carillion could potentially invest up to a further £90 million, in addition to the £129 million of commitments yet to be invested in projects still in the construction phase within the Group's existing portfolio of 26 financially closed projects.  Beyond this we have a strong pipeline of further opportunities in the UK and especially in Canada. 

We therefore expect to continue generating substantial value for the Group by adding new investments to our portfolio, while continuing to explore opportunities to sell investments in mature projects, namely those that have moved from the construction phase into the operational phase, for which there continues to be strong buying interest in the secondary equity market.      

Middle East construction services

In the Middle East, our businesses continue to perform in line with expectations, with revenue and profit weighted towards the second half, due to the timing of project starts and completions.  We expect the overall operating margin for these businesses to be similar to the 7.7 per cent achieved in the first half of 2009 and therefore significantly ahead of our original target of at least six per cent, as we continue to benefit from contracts that were secured on negotiated terms. 

Our progress in the region continues to be driven by our strong brand reputation for quality and delivery, as evidenced by the prestigious contracts we secured in the first half.  Notable first-half wins for Al Futtaim Carillion included the £570 million New York University project, the £80 million UAE University project and a new £31 million IKEA development, in Abu Dhabi, which have increased our healthy order book.

We have also maintained a strong pipeline of contract opportunities worth in the region of £6.5 billion to Carillion.  This reflects the strength of our existing markets, notably in Abu Dhabi and Oman, together with the opportunities we now are targeting in Qatar, where we have recently established a new business. 

In the second half, we expect revenue to grow and offset the reduction in the first-half, with the operating margin remaining well above our original target of at least six per cent.  We also believe that the medium to long-term outlook in the Middle East remains positive and there is significant potential to grow revenue, given the scale of planned investment in our main market sectors, notably in Abu Dhabi, Oman and Qatar.  We also continue to explore opportunities for further geographical expansion into adjacent markets where there are substantial investment programmes in infrastructure, health, education and commercial property.      

Construction services (excluding the Middle East)

Overall performance in Construction services (excluding the Middle East) is satisfactory and in line with previously announced plans to restructure our UK construction business to reduce revenue from £1.8 billion in 2009 to around £1.2 billion over the next three years.  This reduction is in line with the cuts in capital spending on construction announced in the UK Government's Emergency Budget on 22 June 2010.  This is being achieved through financial discipline and applying contract selectivity criteria focused on maintaining the construction capability we need to deliver fully integrated solutions for Public Private Partnership projects and other support services customers, rather than on market sectors that are expected to decline, notably as a result of reduced public sector capital investment.

In Canada, our business continues to grow in line with expectations, with the increase in its first-half revenue more than offsetting the reduction in UK revenue. 

Consequently, we expect overall operating profit in this segment to be slightly ahead of that achieved in the corresponding period in 2009.

Our success in the substantial and developing PPP market in Canada is a key driver of growth.  The leading position we have built in this market is based on our ability to provide fully integrated solutions, including project finance, design, construction and life-time asset management services.  For example, the Forensic Services and Coroner's Complex project in Toronto, on which we achieved financial close in June 2010, will generate £306 million of construction services, facilities management and life-cycle maintenance revenues.    

With 100 per cent of expected full year revenue in this segment already covered by contracts, we expect to make further progress with our objective of improving the full-year operating margin for all construction activities, including the Middle East, towards three per cent.

Outlook

We continue to expect market conditions to remain challenging.  However, we have a resilient and well balanced business in the UK and internationally with strong revenue visibility and good positions in our market sectors.  We remain on track to make further progress in the second half of 2010 in line with market expectations.

Furthermore, the cuts in UK public expenditure announced in the UK Government's Emergency Budget on 22 June 2010 are in line with our plans for reducing the size of our UK construction business and have the potential to create opportunities for our largest business, support services, over the medium term.

Conference call 

  Carillion Chief Executive, John McDonough, and Group Finance Director, Richard Adam, will host a conference call on   

this statement for analysts and investors at 9:00am today, Wednesday 7 July. The telephone number to join the  conference call is + 44 (0) 208 515 2301.

For further information contact

Richard Adam, Group Finance Director                                                                          tel: [phone]

John Denning, Group Corporate Affairs Director                                                               tel: [phone]

Finsbury

James Murgatroyd or Gordon Simpson                                                                          tel: [phone]

______________________________________________________________________________________________ 

  Notes to Editors

Carillion is one of the UK's leading support services companies with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities.  The Group has annual revenue of over £5 billion, employs around 50,000 people and operates across the UK, in the Middle East, Canada and the Caribbean.

In the UK, Carillion's principal market sectors are Defence, Education, Health, Facilities Management & Services, Rail, Roads, Building, Civil Engineering and Utilities Services.

In the Middle East, Carillion's principal market sectors are Construction and Facilities Management. In Canada and the Caribbean, the Group's main sectors are Health, Roads Maintenance and Construction.

Carillion's portfolio of equity investments in Public Private Partnership projects includes projects in the UK and Canada, particularly in the Defence, Education, Health and Transport sectors.

This and other Carillion news releases can be found at www.carillionplc.com

 

END

 

 

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