Broker snap: Low growth and unsustainable margins at Carillion, says UBS

6th Jul 2012 14:40

Support services firm Carillion was a heavy faller on the FTSE 250 on Friday after UBS downgraded its rating on the stock from 'neutral' to 'sell' and slashed its target price from 285p to 230p.Shares in the facilities management, infrastructure and energy services provider were trading 6.2% lower at 251.3p by 14:44.The main valuation drivers for the stock are growth prospects in its Support Services division - these have come down from originally "substantial growth" to just "growth", the broker said in a research note. The category could even see full-year revenue decline this year.UBS said: "Elsewhere, unsustainable construction margins and low cash conversion, due to pension liability and working capital outflows, will likely weigh on the stock." Carillion's first-half trading statement on Wednesday highlighted a deterioration in growth prospects in Support Services with contract losses outweighing contract wins, the broker noted.While earnings guidance has not changed, UBS says that earnings quality has got worse and to reach the broker's earnings per share (EPS) forecast of 42p, UK construction margins have to be 4% "which is clearly not sustainable compared to less than 2% historically and long-term guidance for 2.5%."Nevertheless, the broker noted possible upside risk to its 'sell' rating "if material support services contracts materialise in H2."BC