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Short of the Week: Carillion

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Carillion has been in the news recently with a bevy of landmark construction deals. For example, it has been appointed to build the new headquarters in Sharjah in the United Arab Emirates for Bee’ah, a waste management enterprise. This came with plenty of support from UK Export Finance for the low-carbon project.

Or then there’s the project to extend the platforms at Edinburgh’s Waverley Station, or the extension of a lucrative contract for support services for BT Openreach’s telephone and data networks in England. This latter deal is expected to be worth £500 million in revenue for Carillion in the next three years.

But many fund managers are simply not buying Carillion – they are selling it. Several big fund managers are keeping substantial short positions in the company, led by BlackRock Investment Management and Thunderbird Partners. Immersion Capital is also very negative on Carillion.

So what’s wrong with Carillion? Looking at the three month chart, the company’s shares have been on a steady downtrend. On 15 November it was trading at 260 pence, since when it hit 216.30 on 7 February. Stops need to be fairly wide, however, as there was a brief moment of optimism on 6 December which could have closed out short trades, although this was quickly squelched. We may be seeing another now.

In recent days the market has been picking up slightly, but again, with a number of established peaks set at 221.20, 221.80 and 223.10. Does this mean a resurgence in the company’s fortunes? A lot of the recent optimism has come from the above mentioned Openreach deal, which sees some revenue locked in for the next three years.

It has certainly been a money maker for short traders over the winter months, something for bears to warm their cockles with, if bears had cockles. Part of the issue for the firm has been a slow down in orders following the Brexit vote in June. In 2H 2016, it had a lower order intake than expected, and broker Peel Hunt said in December that this was worrisome.

Part of the problem could be a ‘reassessment’ on spending by British government departments following the Brexit vote. In addition, lower oil prices in the Middle East could mean less money for Carillion’s Arab clients to splurge on expensive projects like the one in Sharjah. If you’re relying on the Middle East for contracts, then you are bound to be somewhat at the mercy of the oil price.

The company has been calling for the government to spend more money on infrastructure in the wake of Brexit – chief exec Richard Howson called on the government to press ahead with PFI2, a revamped private finance initiative scheme used to build schools and hospitals. There is also more capacity needed for the UK’s airports, some of the busiest in the world, the Crossrail 2 train line in London and power generation initiatives.

Yes, there are pressing infrastructure issues the UK government needs to address. Yes, government-sponsored finance will be important in keeping Carillion in cookies in the next few years. But the government is somewhat in disarray at the moment, and has yet to enter talks with the EU over what Brexit will ultimately look like.

Carillion is placing more emphasis on services contracts, like the Openreach one, which it says account for the bulk of its revenue these days. Here we’re talking about keeping stuff running, rather than building new stuff. Fund managers, however, seem to be betting that Carillion is still dependent on new construction and UK contracts to keep the money rolling in.

You can take short positions on the price of listed companies using spread bets or CFDs. A sell order will usually open a short position and a subsequent buy order will close it. Spreads will vary depending on how liquid the shares are. Spreads can be wide for stocks which are thinly traded. Always make sure you use stop losses – the sky is the limit with short trading, as the theoretical upside of a stock price is much higher than the downside. Check out our list of authorised and regulated brokers within our broker directory.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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