The Carillion plc (LON:CLLN) (CLLN.L) share price has declined by 60% today after the company released a profit warning. It anticipates that profits for the full year to 31 December 2017 will be materially lower than current market expectations.
This is due to a combination of delays to certain PPP disposals, a slippage in the commencement date of a significant project in the Middle East and lower than expected margin improvements across a small number of UK support services contracts. Although they have been offset to some extent by cost savings, the company’s financial performance is expected to disappoint versus previous guidance.
Due to the new guidance on future profitability, Carillion now expects a covenant breach as at 31 December 2017. The company has been in discussions with its lenders and with their support has decided that it is necessary to defer the test date for both of its financial covenants from 31 December 2017 to 30 April 2018.
By this time, the company expects to be implementing a recapitalisation plan. This may involve a restructuring of its balance sheet, with the company expecting to commence steps to implement the chosen option during Q1 2018. The aim of this is to enable the company to achieve its target net debt to EBITDA ratio of 1-1.5x by the end of 2018.
In my view, Carillion faces a challenging outlook. Although its self-help measures seem to be having a positive impact on its financial performance and could improve its outlook over the medium term, in the short run it faces a period of uncertainty. This may lead to further share price volatility and even additional declines in its valuation as investor sentiment now seems to be extremely weak following today’s share price fall.
Therefore, while Carillion is a stock I’m following closely, it’s not a company I’m looking to add to my ISA at this moment in time.