Why I'd avoid shares in Carillion plc despite today's share-price surge
Shares in construction and support services group Carillion(LSE: CLLN) plunged dramatically back in July, falling 70% in a matter of days.
The significant drop was the result of a nasty profit warning, in which the company hit the market with a plethora of bad news. First, Carrilion advised that a deterioration in cash flows had led the board to undertake an enhanced review of the group's material contracts. Second, the group stated that the review had led to an expected contract provision of £845m. Third, the company advised that this year's performance was expected to be below management's previous expectations. And last, but not least, Carillion stated that it would be suspending its 2017 dividend. No wonder then, that the shares declined from 190p, to around 55p in just a few trading sessions.
After trending even lower over the last three months, shares in Carillion have surged 9% today after the company released an update to the market. Is the outlook less grim then?
The update from Carillion today is a broad one that covers financing, disposals and contract wins.
In terms of financing, the company advised that it has signed two committed credit facilities, totalling £140m, and that this additional liquidity is available to draw down now. The £140m credit consists of a £40m senior secured revolving facility maturing on 27 April 2018 and a £100m senior unsecured revolving facility maturing on 1 January 2019.
Furthermore, the group stated that it has agreed new committed bonding facilities, as well as the deferral of both certain pension contributions and the repayment of private placement notes due in November 2017 and September 2018. Taken together, the new credit facilities and agreed deferrals improve the group's headroom throughout 2018 by approximately £170m-£190m.
Carillion also advised that it has signed heads of terms with Serco Group for the disposal of a large part of its UK healthcare facilities management business. It intends to dispose of the remaining contracts in this area during 2018.
And it announced several recent contract wins, including a £200m contract with Gigaclear to build a broadband network in Devon and Somerset.
Interim chief executive Keith Cochrane said: "Today we are announcing progress on a number of fronts and whilst our customers and creditors continue to be supportive, much remains to be done. We remain focused on executing our disposals and cost savings programmes while continuing our discussions with our lenders and other stakeholders to explore further ways of strengthening Carillion's balance sheet."
Beware the short interest
Reading the update, the company certainly looks to be taking steps in the right direction. However, there's one key reason that I'll be avoiding shares in Carillion for now.
When I last covered it back in July, I noted that 'short interest' on the stock was incredibly high, with 21.5% of the shares being shorted. In other words, a large number of hedge funds and other sophisticated investors were betting on the share price falling.
Three months later, the company still has a very high proportion of short interest at 16.5%, and is still the most shorted stock in the UK at present, according to shortracker.co.uk.
That suggests that many institutions remain negative about the company's future prospects, and expect the share price to fall further. For that reason, I'll be steering well clear of the shares for now.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.