Struggling construction and infrastructure group Carilllion saw its shares drop 39% in yesterday’s trading following a sales warning.

Richard Howson has stepped down as Group Chief Executive with immediate effect and been replaced on an interim basis by Keith Cochrane, previously a Senior Independent Non-Executive Director, while the search is underway for a new Group Chief Executive. The UK Building MD has also exited. Richard Howson will however stay with the Group for up to one year to support the transition.

Deterioration in cash flows on a select number of construction contracts has led the Board to undertake an enhanced review of all of the Group’s material contracts, with the support of KPMG and its contracts specialists.

The group has launched the strategic and operational review of the business and its capital structure with what is described as “all options being given appropriate consideration.”

Contract provision of £845m in 2017 - construction trading difficult in UK and Middle East

The review has resulted in an expected contract provision of £845 million at 30 June 2017. In its latest half year trading update the company is reporting a notable deterioration during 2017, with construction trading described as difficult in both the UK and Middle East. Four large contracts –the PPP work in the UK, 1 in Middle East-  account for around half the provision, with all four completing within the next 18 months.

As a result of the enhanced contracts review and the strategic actions being put in place, reflecting difficult markets and exits from certain territories, Carillion is issuing revised full-year guidance, with overall performance expected to be “below management’s previous expectations.”

The group is warning that full year figures will be lower than anticipated, with revenue during 2016-17 somewhere between £4.8 billion and £5.0 billion. Dividends for 2017 have been suspended – a saving  of c£80 million pa  - and the Board will review dividend policy in 2018.

Carillion has seen significant deterioration in cashflows on a small number of construction contracts, coupled with the impact of a number of UK construction contracts reaching completion not replaced by material new starts. Contracts had also been impacted by the decision to exit construction in Canada and certain territories in the Middle East

Yesterday Carillion announced that sale of 50% 0f its Oman business Carillion Alawi for up to £42 million had been put up for sale, including £12 million upfront, with three more businesses currently in a sale process. The group is targeting non-core disposals proceeds of £125 million within 12 months.

Damage limitation decisions already undertaken include exiting PPP construction and Egypt, Saudi Arabia and Qatar construction.

Lessons learned identified by Carillion include acceptance of a high degree of uncertainty around key assumptions, success contingent on performance of others not under the firm’s control and design changes agreed without first agreeing incremental cost and value.

International construction and PPP work identified as two clear root causes of problems 

The Group has identified the two clear root causes of its woes as international construction and PPP construction. Carillion is taking steps to reduce its exposure to PPP construction, which currently stands at 15% of construction revenue and tracking towards zero by 2018. Overseas exposure would also be reduced with the Group focussing only on contracts supported by UK Export Finance.

Looking ahead, Carillion’s strategy will be to bid only on lower risk procurement routes for construction contracts. Going forward, the Group plans to adopt what it describes as a “highly selective approach” targeted at Support Services customers and a specific focus on the UK.

Striking a positive note, Carilllion also reported strong work winning performance , with £2.6 billion of work won, with its Support Services  division providing  £2.1 billion of the new wins in H1. Around 70% of construction work won in the UK was for repeat customers and all is under lower risk procurement routes.

A substantial programme of action to reduce net debt is also underway and Carillion sees scope for significant further cost efficiencies – to be quantified as part of the strategic and operational review.

Outlook underpinned by more than 90% of work won in H1 for repeat customers with long-term contracts. Carillion has also reported high revenue visibility in Support Services – 94% for 2017, 58% for 2018 and 44% for 2019. No significant renewals are due until end 2019 and the group has been selected on frameworks worth £23 billion in total.

Commenting on the update, Philip Green, Non-Executive Chairman said,

“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.

“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.

“In addition, we are also announcing that we are undertaking a thorough review of the business and the capital structure, and the options available to optimise value for the benefit of shareholders. We will update the market on the progress of the review at our interim results in September.”