The chief executive of Carillion has stepped down as the outsourcing group issued a profit warning and announced a strategic review, triggering a 39 per cent plunge in its share price.
The FTSE 250 group, which is the most shorted stock on the London exchange, said on Monday that full-year revenues and “overall performance” would be lower than management’s expectations because of “difficult markets” and measures to cut borrowing. The company also said first-half operating profits would be lower than expected, without providing specific guidance.
The company announced that Richard Howson had stepped down as chief executive after five years “with immediate effect” and was being replaced temporarily by Keith Cochrane, a non-executive director and former chief executive of Weir Group and Stagecoach. A search for a permanent chief executive was under way and Mr Howson would stay with the company for up to a year to help the transition, the group said.
Chairman Philip Green said Carillion would miss its debt reduction targets for 2017 and that “we have therefore concluded that we must take immediate action”.
As well as speeding up measures to cut debt, he said Carillion would be “undertaking a thorough review of the business and the capital structure”.
The company said that late payments on construction contracts and a fall in working capital due to contracts not being replaced meant average net borrowing in the first half would be £695m, compared with £586.5m last year.
Because of this, Carillion said dividends for this year would be cancelled and it would try to leave “non-core” markets.
It said it would be “highly selective” in taking on new contracts and would only do so via “lower risk” routes.
A review by Zafar Khan, Carillion’s finance director, had been started because of the worsening cash flows on some contracts and resulted in a writedown of £845m, the company said. Mr Khan joined Carillion’s board as finance director in January and was previously its group financial controller.
Revenues for the year are expected to be between £4.8bn and £5bn, down from a previous estimate of just over £5bn.
Carillion’s share price fell 39 per cent on Monday in London, taking its decline during the past year to more than 50 per cent and giving the group a market capitalisation of about £500m.
The sharp drop in the share price is a victory for an array of hedge funds that have bet against the company. At least a quarter of Carillion’s shares were sold short, led by Marshall Wace, Thunderbird Partners and BlackRock, according to data that track short positions of at least 0.5 per cent of the shares.
Stephen Rawlinson, analyst at Applied Value, said “it looks like the board had been a tad over optimistic for too long”. The “catalogue of areas of concern” was “mainly around over-optimistic assessments of expected profitability and worse than expected contract cash flows”, he said.
“Arguably this write-off should have happened several years ago and has been bad news waiting to happen,” he added. “There is a good business in there, especially in services, but clearly the company was too attached to its Middle East construction operations.”
Further coverage of Carillion
Get alerts on Carillion PLC when a new story is published