Construction and support group Carillion (CLLN) shares are down another 18% this morning to 99p/100p having breached Q4 2002 support at 106p to trade levels not seen since late October 2000. After yesterday’s 39% drop, this takes the declines to 48% in less than two sessions. Investors (both those nursing losses and those circling for a bargain) are understandably asking where the next levels of support are. Unfortunately not until 83p (late Sept/mid-Oct ‘00 lows) and then 81.5p all-time lows (March ‘00). This doesn’t sound far away, but the lowest of the two represents another 17-18% fall from here.

And it’s still early days in terms of the announced capital structure review. This could easily comprise a highly dilutive rights issue to reduce debt and shore up the balance sheet. Hedge funds have already done well by shorting the stock in anticipation of corporate troubles. However, they may decide to stay the course seeing these financial woes (financial stress, profits warning, dividend suspension, CEO departure) having legs, and expecting the above-mentioned remedial work to take the shares even lower.

The shares are flirting with 100p again, however, this may simply be psychological. A near 50% discount may be attractive but the overhang of a steadily increasing debt pile at odds with poor cash flow and a lack of leadership may prove too much to ignore for even the most daring of bulls.

Mike van Dulken, Head of Research, 11 Jul 2017