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Carillion worth a punt on takeover speculation? CLLN

The share price of Carillion PLC (LSE:CLLN) has been in decline since it’s last peak at 396 in early 2014. It slipped to an all-time low of 40.15 in August this year before a short-lived bounce to 67.5 on takeover rumours. The rally was swiftly reversed on the publication of abysmal half year results revealing a £1.15bn loss. This week the price has hit recent support of 42.5 and bounced but is this the bottom for Carillion?

Grizzly Balance Sheet

There’s an overwhelming case to be bearish on the stock with the company’s balance sheet clearly in dire straits. 2 profit warnings in quick succession, an £845m write down in July and a ballooning debt pile have all added to the company’s woes. Carillion’s liabilities dwarf its current Market Cap, which stands just shy of £200m and full year underlying pre-tax profits have been downgraded to £115m from an expected £140m. Potential asset sales have been highlighted but this won’t be enough, and with such a low Market Cap, a simple Rights Issue is unlikely to winch the company from the rubble. According to Reuters some of Carillion’s creditors have hired law firms in anticipation of debt restructuring which may include debt-for-equity swaps.

Worth a punt?

On the positive side, Carillion is continuing to secure substantial contracts such as the headlining HS2 joint venture and its order book currently stands at around £16bn. In fact, the government still entrusting Carillion with key projects may give some assurance that the company will live on to fight another day. If the proverbial can gets kicked further down the road and an aggressive restructuring of the business ensues then even with significant dilution, at today’s share price Carillion could be worth a look.

The key levels to watch out for on the chart are strong support at 42.5 and last resort support at 40. Should support be broken I suggest 32p could be the next rock that catches its fall.

White Knight

I don’t think we have heard the last of takeover rumours, and perhaps a White Knight will come knocking. If not, fellow constructor Balfour Beatty has shown it’s possible to reverse your fortunes and become the hunter rather than the hunted. A little earlier today Carillion announced, it “has received proposals from more than one credible counterparty for a possible acquisition” of its healthcare business. If this sends out the message that the company is open to other offers, it might well provoke a bidding war. That could trigger a decent rally in Carillion’s share price.

If you do fancy the chances of recovery a tight stop loss below 40 might be advisable….but maybe don’t bet the house on it.

 

DISCLOSURE

The author of this piece does not own shares in Carillion.

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