Tracing back the history of the AWPR to June 2014 when first announced that it had won the project as part of the consortium between Carillion and Kier. The Construction pmi and CPA were predicting great things for the industry going forward. Brokers were predicting GT profits to grow by 15-23% over the period 14/15. Greg Fitzgerald was reported as saying
" Construction is working hard to protect margins on projects won during more challenging times"
"The division is winning work with appropriate margins and inflation protection with a continual focus on risk management"
It begs the following questions:
1. Are GT using the legacy contract excuse too much?
2. Why did the AWPR and others go so badly wrong?
3. Can you trust what is being said surrounding risk management and bidding strategies or is it lets price pretty much anything and see how we get on?
In the wake of the Carillion (CLLN) collapse, investors were in no mood to take prisoners. So, when Galliford Try (GFRD), already smarting over previous fixed-price contracts that went wrong, announced a further £25m provision to cover its involvement with Carillion and the Aberdeen road project, the share price was marked down by nearly a fifth.
Galliford Try PLC
1.86% Price (GBP)
Sentiment was further undermined by news that £150m is to be raised through a fully underwritten capital placing. At the same time, it has brought forward plans to restore a two times dividend cover on pre-exceptional earnings, which means that the half-year dividend has been cut by 13 per cent to 28p a share.
Taking on fixed-price contracts works well until rising costs lead to eroding margins, and Galliford has already booked an exceptional charge of £98.3m to cover these contracts taken out in 2014 and earlier, with the last due for completion in mid-2018.
On a brighter note, Linden Homes, which accounts for just under a third of group revenue, benefited from further strong demand for new-build houses, and its operating profits were lifted by 9 per cent to £80.9m, with margins up by 18.5 per cent and completions up by 6 per cent. And average selling prices, which include affordable housing, rose from £287,000 to £309,000.
Galliford also increased its exposure to the affordable, private rented and mixed tenure side, increasing the order book by 41 per cent to £1.3bn. Work secured included a new joint venture with Trafford Housing Trust to deliver a £100m, 600-home regeneration scheme in Manchester.
In the construction division, pre-exceptional operating margins grew from a wafer thin 0.4 per cent to 0.9 per cent, but uncertainty remains over the amount that will be recovered relating to final settlement of legacy contracts. However, the order book edged up to £3.5bn, and 99 per cent of projected revenue for the year to June has already been secured and 61 per cent for the following financial year.
GALLIFORD TRY (GFRD)
ORD PRICE: 808p MARKET VALUE: £672m
TOUCH: 808-811p 12-MONTH HIGH: 1,592p LOW: 772p
DIVIDEND YIELD: 11.4% PE RATIO: 15
NET ASSET VALUE: 681p* NET DEBT: 15%
Half-year to 31 Dec Turnover (£bn) Pre-tax profit (£m) Earnings per share (p) Dividend per share (p)
2016 1.24 63.0 61.9 32
2017 1.40 56.3 56.3 28
% change +14 -11 -9 -13
Ex-div: 15 Mar
Payment: 6 Apr
*Includes intangible assets of £177m, or 213p a share
Galliford Try is very different to Carillion. It has a vibrant housebuilding arm, and unlike Carillion it has very little debt. Even with a rise in dividend cover, the yield is forecast to be over 10 per cent for the full year to June 2018. However, the shares have fallen more than a third since the start of the year, and now trade on just 1.3 times net tangible assets. But, while we would be happy to ride out the current storm, sentiment is stacked against the shares, and we exit our buy recommendation (1,104p, 17 Oct 2013). Hold
Last IC View: Buy, 1,389p, 13 Sep 2017
Well done Triggers broom, much nicer and worked. I had realised the link was overly long which is why I put direct pdf link in my post. I simply opened link from a ShareScope email and copied and pasted resulting URL from my browser.
I approve Phil's comments about beware of construction companies and would extend it to a lot of service companies like BAB and MCRO which I regret having shares in. Investors should beware of the allure of high yields which come with high risk to capital.
I - incorrectly- presumed that it would be a placing.
I apologise re same.(read slower when angry!)
For the record the RNS stated:
"Galliford Try plc ("Galliford Try" or "the Group") today announces that it proposes to raise £150m of new equity capital (the "Capital Raising") from its shareholders in the coming weeks and is also providing an update on Galliford Try's dividend policy.
Galliford Try today has separately announced its Half Year Results for the six months to 31 December 2017. ----"
(Unless of course - it is limited to a select group of larger shareholders)
It looks to me like a Rights Issue, in which case we will all get an offer, or do you think it is an institutional Placing?
but they also say, imply (sorry haven't got time before leaving to check) that the £150m is purely for the construction division so they don't have to withdraw operating cash from the other 2 divisions which are performing well.
Also, I didn't notice anything about the claims they have against Aberdeen for failure to divert traffic as they should have....could be included in the £150m or not mentioned so will be a bonus if/when arrives?
Don't forget the valuations Tony Yarrow highlighted if the construction side were to just "GO".....
Yes, I got my timing completely wrong and so payback will be slower / longer but have to say a near 200p fall seemed extreme......expected 50-100p....but what do I know?
''However, the compulsory liquidation of Carillion plc ("Carillion") has placed additional financial obligations on the Group arising principally from the joint venture with Carillion and Balfour Beatty plc on the Aberdeen Western Peripheral Route contract ("AWPR").
The over-run costs on AWPR, compounded by the compulsory liquidation of Carillion have increased the Group's total cash commitments on the project by in excess of £150m.''
It seems to be that they had massive cost overruns on the Aberdeen bypass before CLLN rolled over. I think the current estimate is for a net 10% loss on a project that they now have an even bigger stake in.
I really hope they have learnt their lesson. Though a reference to the strengthening of the balance sheet enabling them to take on more/ bigger projects fills me with a great deal of trepidation
My interpretation is that the additional £150m is to strengthen the balance sheet, in order to allow further investment in the other growth areas of the business where margins and opportunities for increased profit contribution remain positive. The new capital isnt purely required to cover obligations on the Scottish project. The SP fall has been overdone as the fundamentals and mid term outlook for GFRD remain extremely positive. Sheep mentality as is the norm in the City has chased it down with an over reaction, and it will drive it back up again as smart money recognise a divi potential.
I have to admit that on reflection GFRD claim to need an additional £150m to meet the additional obligation caused by CLLN on a £800m (total cost) project that is due to finish in 6 months time makes no sense at all.
Dont forget BBY are also on the hook with a similar obligation.
It certainly doesnt smell quite right.......IMHO
" Galliford Try (LSE:GFRD) We received a few plaintive emails asking us to look at this lot from our Trend perspective as ideally everyone wants to know where bottom might be. The answer(s), given the days 19% reversal, are probably not ..."
It should be obvious what is going on. This poor company seems to have contractual liabilities of £150 million thanks to the collapse of Carillion. But it could be a lot more; £150 million is just the best estimate at the moment. This is made worse because the Carillion/GT joint venture was ckearly a fixed price contract deal. The company says it has learnt its lesson and will no longer bid for fixed price contracts.
Compared to similar companies GT has a relatively strong Balance Sheet with manageable debt and well within banking covenants, so why does it need to raise equity? The only possible explanation is that the amount of the hit is unknown and that the risk is that in the worse case scenario banking covenents might be breached. So the company is playing safe. By holding the dividend the company is offering investors a carrot to invest in the rights issue. The gets the underwriting banks off the hook, but the share price will undoubtedly fall if the cost of fixed price contract(s) is greater than £150 million. As stated in other messages, when a company need a rights issue to be comfortable financially, it means that shareholders are effectively paying for the dividend out of their own money.
There is clearly a great deal of uncertainty here; get out while the going is good. In any event averaging down is a flawed strategy.
I expect that the underwriting is along the lines of; The RI price will be (10%,15%,20% ??) below the closing price on a specified day after the release of this news.
So for example;
If we hang onto 800p until Friday night. Then the RI might be released on Monday with an offer of 2 for 7 @ 675p.
And the underwriters will cover the 675p
Yes. The note on dy carries the implication that new shares will not be eligible. Also that the placing may not complete until after the register trip date. I'm assuming they increase shares ca +25%, say to ca 104m. This would put them on the cusp of having to cut the dy, though they might just get away without. That said I've never before seen an IMS on an emergency rights/placing, claiming to be already underwritten, with no info on no. shares & price, & net/gross receipt (ie underwriting costs). In the round this leads me to believe the problem(s) has not been fully unravelled/valued & thus the extent of the placing is still uncertain, as is its timing. So I'll wait for the other shoe to drop. The housing component is interesting, but dwarfed by the construction arm which is high risk, poorly managed & then some, & largely a waste of space. But as ever we shall see!
They have actually cut the dividend from 32p to 28p.
this is payable to shareholders on the books on 16th March
''Planned increase in dividend cover to 2.0x pre-exceptional earnings brought forward and effective immediately. Interim dividend of 28.0p declared.''
I'm assuming that the Capital raising and new shares will not qualify for this dividend ????
However if the current Market Cap is £663M (800p * 82.89) and we need an extra £150M. Then as a minimum we will end up with 101M shares (more likely 110M.....IMHO). So not surprisingly the next divi will be smaller. ie reduced by ~25% in order to maintain divi cover.
This is a very rough pari passu guess.
It would give a yield of ~7.5%...........which is still quite decent........IMHO
Continuing to pay and and even raising the dividend and at the same time doing a capital raise seems dumb
I have to agree with you.
They should have cut the dividend.
Cobham raised funds without cutting the dividend. It led to further profit warnings, a change in management, more fund raising, cuts to the infrastructure, a collapse in the share price, and they are still in the mire.
0.9% margins on 3.5B of construction revenue. You wonder why such companies bother. If they haven't been able to make money post 2009 recovery, how are they going to do so as things cool off now.
Continuing to pay and and even raising the dividend and at the same time doing a capital raise seems dumb. Do they think share holders are stupid ?
- talk about robbing Peter to pay Paul...
BOD clearly fallen for the snake oil salesmen in the City, as £150m could be generated by passing on the divi for 2 years. So without cutting the divi substantially, this is just a fee generating frenzy for the sharks.
Clearly construction is a big problem quite apart from the Aberdeen shambles. 0.9% margins before the bad stuff are just not enough to absorb the inevitable justified or not rows by the clients.
Well success these days seems to comprise not making money, but rather not losing it! So GT. Ive dodged the bullet again. They don't call me twinkle toes Fred Astaire for nothing Ive banged on about these before & not in a good way. Results out: house building good & construction a bottomless pit of woe. So admission today theyre basically short min £150m cash (against mkt cap max £700m). So major placing underway. Dont worry though, theyre still maintaining the high quality order book. Phew, thats ok then thought they might a major long term issue in construction. Wot a larf. Note no info yet on no. shares to be issued, price p share, or expected net & gross proceeds (ie the cost of the underwriting). None of that bodes well. But don't worry, they've promised to give you a bit more of your own money back.
Yes yes -I know I'm just an old cynic ..............
I usually get the market reaction wrong, but Im quite positive about these results and Capital raise. Though it is a shame that they could not simply borrow the money for 6 months.
Ill continue to hold anyway.
The Group has brought forward plans to increase dividend cover to 2.0x pre-exceptional earnings. Reflecting this, and the Group's strong underlying performance during the half year to 31 December 2017, the directors have declared an interim dividend of 28.0p per share (H1 2017: 32.0p) which will be paid on 6 April 2018 to shareholders on the register at close of business on 16 March 2018.
The over-run costs on AWPR, compounded by the compulsory liquidation of Carillion have increased the Group's total cash commitments on the project by in excess of £150m.
£150m raised in order not to divert operating capital away from other divisions.
All seem sensible and measure decisions at first sight....and cash raising might explain softness in SP.
I topped up a few minutes ago, in a modest way.
The shares have taken a real bashing and I am 'not drowning' but am definitely 'under water' with my investment. Nevertheless, with a well covered divi and hopefully some psitive news tomorrow, I am reasonably confident this one will eventually head in the right direction.
Good luck all!
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