Carillion lifted by rare optimism

Carillion announced a rare piece of good news in the construction sector as it guided investors to expect higher earnings because of resilient trading and a lower tax burden.

Shares in the company, which now makes most of its money from providing services such as building maintenance and from investing in public-private partnerships, rose 19½p to 239p. Much of the benefit announced on Wednesday comes from Carillion’s purchase of Alfred McAlpine in February.

“We’ve broken the back of the integration process,” said John McDonough, chief executive, revealing a further £10m of integration and reorganisation cost savings, bringing the expected total to £50m for the period until the end of 2009.

Carillion is set to benefit from prior-year losses made by McAlpine, reducing its effective tax rate from 25 per cent to 20 per cent. That overall level will continue past this year because of new tax rules announced in the pre-Budget report last month, Mr McDonough said.

The bulk of the company’s profits come from equity investments in government partnership projects focused on defence, health, education and transport infrastructure, where government has indicated it is keen to boost spending.

Analysts upgraded profit forecasts and target prices.

FT Comment

Shares in Carillion have fallen nearly a third in the past six months, as investors fret about the fate of the UK construction sector. That looks misplaced: only 10 per cent of Carillion’s profits stem from UK construction. Some of its other businesses, such as Middle East building, will also fare poorly in the downturn. But many divisions will hardly notice lower consumer spending and could end up being among the first to benefit from government pump-priming. Carillion trades at about 7 times forecast earnings. Sentiment is bound to hurt the shares further in the short term, but more patient investors will benefit from a dividend yield pushing 6 per cent.

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