Regardless of how popular assets such as equities are in any given year, you’ll always get losers in the stock market. Without a doubt, one of the biggest of 2017 was construction and support services firm Carillion (LSE: CLLN).
So, what went wrong and was the writing on the wall for all to see?
Annus horribilis
To say that Carillion shareholders had an awful year isn’t completely accurate. Indeed, the first six months of 2017 showed little indication of the carnage that was to follow. Beginning the year at 238p, shares remained above the 200p mark until June. As the FTSE 100 began touching record highs, casual observers may have interpreted the gradual fall as nothing more than investors taking some money off the table in what was rapidly becoming a rather expensive market.
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What happened next, however, was nothing less than a cautionary tale on the risks of investing in single companies. On July 7, Carillion’s stock could be purchased for 192p. In six days, this had dropped to 55p — a fall of over 70% — as investors fretted over news of contract writedowns (to the tune of £845m), worsening cashflow, the swift resignation of CEO Richard Howson and the removal of dividend payments.
Following its inevitable relegation from the FTSE 250 in August, a “disappointing set of results” in September — including the announcement of a further £200m of writedowns — heaped even more pressure on the board. Despite continuing to win contracts (most notably to assist in the construction of the HS2 rail network), the beleaguered company issued its third profit warning in five months in November and stated that it was in danger of breaching its debt covenants. The shares halved in value in a single day.
By mid-December, it confirmed that it had reached an agreement to sell a large proportion of its UK Healthcare Facilities management business to outsourcer Serco as part of its plan to dispose of £300m worth of non-core assets. A total of £47.7m will now be paid by the latter in instalments with the first arrangement expected to be transferred in Q2 of next year. This was swiftly followed by the announcement that the company had moved the start date of new CEO Andrew Davies forward to January 22 from the beginning of April. Quite where Carillion’s share price will be then is anyone’s guess.
Tell-tale sign
Could investors have foreseen this fall from grace? While it’s easy to be wise after the event, the fact that it was by far the most shorted share on the stock exchange should have set alarm bells ringing.
Even in December, Carillion remains truly hated with nearly 17% of its shares being shorted according to shorttracker.co.uk. This suggests that many are betting against the company staging any kind of recovery. When you compare the amount of debt on its books (now estimated at roughly £1.5bn) to the company’s valuation of just £73m, that feels entirely rational. To be sure, surviving past 2018 will be a momentous achievement based on current circumstances.
With horrific debt, no dividend and a hugely tarnished reputation, Carillion is about as uninvestable as they come and a brutal reminder for investors that taking an early loss — while difficult — can sometimes be the best course of action.
