Carillion in trader’s crosshairs on London markets

The UK contractor Carillion, whose UAE joint venture built Dubai’s Festival City, has become the target of hedge funds and other investors betting on a fall in its share price.

According to the data provider Markit, more than 23.5 per cent of the shares in Carillion are being held on loan. Traders who want to bet on a share falling in value usually hold shares on loan with a view to buying them at a lower price in the future.

The Markit data suggests that Carillion has become the most shorted stock on London’s FTSE 250 Index and at close of business on Wednesday the company’s shares finished at 314.50 pence – its lowest price since the start of 2015 and about 15 per cent lower than its 12-month high in February.

The company hit its peak shortly after announcing that it had been awarded two contracts in Dubai from government-owned Meraas Holding worth a combined £380 million (Dh2.16 billion) – the £155m La Mer beachfront scheme on the Jumeirah waterfront and a £225m mixed-use project on the Dubai Creek.

Late last month, Carillion posted a flat pre-tax profit figure of £67.5m for the six months to June 30, despite revenue increasing by 21 per cent to £2.26bn (2014: £1.87bn). Sales from its Middle East construction division increased by 54 per cent year-on-year to £327m.

However, analysts have pointed to concerns over the quality of the company’s earnings and its debt levels.

UBS has just cut its target price on the company to 230p (from 235p) and maintained its sell rating on the stock. It blamed lower-than-anticipated earnings from projects in the Middle East for the firm’s deteriorating margins, saying that underlying earnings figures are expected to be 2.1 per cent lower this year.

Overall debt levels are also set to increase to £500m, and when pension deficits and other liabilities are added in, its total leverage is expected to increase to £987m (2014: £931m).

“We think that is too high for a business like Carillion, which has a degree of project risk,” UBS analysts said.

Yet Harry Stevenson, an analyst with Beaufort Securities, said that the company’s shares remain attractive. Its net debt of £200m is in line with expectations.

He said the company still offers an attractive dividend yield of 5.5 per cent.

“While we see some margin erosion in the medium term, we still think it will remain above [analyst’s] peer guidance.”

“We like its exposure to the Middle East, its above average industry construction margins and anticipate a recovery in UK construction.”

About 14 per cent of Carillion’s total 2014 revenue and 11 per cent of its profit came from its Middle East operations.

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Michael Fahy

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