Integrated support services company, Carillion plc, is providing this update on trading in the first six months of 2012 ahead of announcing its interim results on 22 August 2012.
First-half trading is in line with expectations.
As expected, the planned re-scaling of UK construction, together with the timing of project starts in the Middle East, means total revenue will be lower than in the first half of 2011.
Total operating margin is expected to increase.
Cash flow and balance sheet remain strong with net debt expected to be around £125m.
A further £20m of equity in Public Private Partnership (PPP) projects has been sold.
Total first-half new orders and probable orders worth up to £2.2bn.
Operational integration of Carillion Energy Services is largely complete, with integration cost savings expected to reach our target of £25m by end 2013.
Underlying(1) profit and earnings are on track to meet full-year expectations, despite market conditions remaining challenging.
Despite challenging market conditions, trading in the first six months of 2012 is in line with the Board's expectations, as the Group continues to benefit from a resilient business mix and from adhering to the strict selectivity criteria we apply to choosing the contracts for which we bid.
As expected, total revenue will be lower than in the first half of 2011. This is due primarily to lower UK construction revenue, as we continue the planned re-scaling of our UK construction activities to align them with the shrinking UK market and, as also previously announced, to Middle East construction revenue being second-half weighted, which reflects the timing of project starts.
The Group's total first-half operating margin is expected to increase, reflecting the benefit to margins of re-scaling our UK construction business, together with our group-wide focus on contract selectivity.
The value of the Group's order book and probable orders is expected to remain strong at around £18.0 billion and the Group's pipeline of contract opportunities is expected to have increased to some £35 billion.
Net borrowing at the half year is expected to be approximately £125 million.
In support services, first-half revenue and the operating margin are in line with expectations. We therefore continue to target full-year revenue growth in this segment with the full-year operating margin remaining broadly stable. The integration of Carillion Energy Services (CES), following its acquisition in 2011, is largely complete and we remain on track to deliver integration cost savings at an annual rate of £25 million by the end of 2013. We continue to be encouraged by the outlook for growth in Local Authority outsourcing. In May 2012, we won a contract to provide integrated property and facilities management services for Oxfordshire County Council, worth up to £700 million over 10 years, the first large, complex Local Authority contract of this kind. During the first half of the year, we also won, or were appointed preferred bidder for, a number of other significant support services contracts. In Canada, we were appointed as the preferred bidder for two 12-year highways maintenance contracts in Ontario, together worth some £120 million.
In Oman, Carillion Alawi has been appointed as the preferred bidder for a three-year facilities management contract for Petroleum Development Oman, worth approximately £75 million over three years and with an option to extend the contract period by a further five years. In the UK, we won a £62 million Managed Motorways contract for the Highways Agency, a five-year contract for the Ministry of Defence to provide facilities management services for United States Visiting Forces worth some £45 million, a three-year contract for Direct Line Group worth £22 million and two energy services contracts for the Northern Ireland Housing Executive worth £60 million over four years. In addition, sales of Ecopod have already reached £20 million since we began marketing this award winning energy efficient heating system earlier this year, and the scope of our contract with Openreach has again been extended, as we continue to support Openreach in delivering the roll-out of superfast broadband across the UK. Consequently, notwithstanding the intended in-sourcing of two contracts by our customers, we continue to have a healthy support services order book. We have also maintained a strong pipeline of contract opportunities, notably as a result of further Local Authority outsourcing contracts coming to market, and this continues to support our objectives for growth.
Public Private Partnership (PPP) projects
Our portfolio of PPP projects continues to perform well and we continue to sell investments in mature projects and to reinvest the proceeds in new projects. During the first half of 2012, we sold equity interests in three projects, which generated cash proceeds of approximately £20 million. At 30 June 2012, we had a portfolio of equity interests in 23 financially closed projects in which we had invested approximately £101 million of equity and in which we are committed to invest a further £107 million. The Directors' valuation of this portfolio at 30 June 2012, based on invested equity of £101 million and on discounting the cash flows from our investments at nine per cent, is expected to be some £163 million. Looking forward, we continue to be shortlisted for the Royal Liverpool Hospital project, in which we could invest up to £25 million of equity, and on which a preferred bidder decision is expected towards the end of 2012. Beyond this, we believe the medium-term outlook for PPP projects remains positive. New project opportunities in the UK await the outcome of the Government's review of the current PFI model, which we expect to play a key role in delivering the UK Government's £250 billion National Infrastructure Plan, as the Government has indicated that up to some 70 per cent of this Plan will be privately financed. In Canada, Infrastructure Ontario is moving forward with its new 10-year Alternative Financing Procurement (AFP) programme, under which it plans to invest approximately C$35 billion over the first three years, notably in the health sector where Carillion is a market leader. During 2012 and 2013, we expect to begin bidding for up to five new projects in Ontario and for two projects in British Columbia, together potentially worth in the region of £2.5 billion to Carillion.
Middle East construction services
As previously announced, revenue in Middle East construction services will be second-half weighted in 2012. This is due to the timing of project starts, which can have a significant effect on revenue movements between financial reporting periods, given our strategy in the Middle East is to focus on large projects for a small number of financially robust customers, for whom quality and reliability are paramount. During the first half, we secured a number of significant new contracts in the region. For example, Carillion Alawi has won a £40 million contract to construct Sidab Harbour for the Royal Oman Police and a £42 million contract to build the Sultan Qaboos Mosque at Nizwa for Royal Court Affairs. In Abu Dhabi, Al Futtaim Carillion (AFC) has been awarded a £45 million contract by EMAL (Emirates Aluminium) to provide infrastructure works for Phase 2 of its new aluminium smelter, which follows AFC's successful completion of Phase 1, worth over £100 million. In line with our strategy of geographical diversification in the Middle East, we remain positive about our prospects for extending our operations into Saudi Arabia during 2012, where major investment programmes offer significant prospects for growth. The operating margin in this segment has moved back towards six percent, in line with previously announced expectations, as negotiated contracts have now been largely replaced by contracts won through competitive tendering. The value of our Middle East order book plus probable orders remains strong and our pipeline of contract opportunities has increased further from the 31 December 2011 level. Therefore, while Middle East revenue is not expected to grow sufficiently to offset a lower operating margin and deliver earnings growth in 2012, the medium-term outlook for profitable growth remains positive and the target we announced in 2010 of doubling our Middle East revenue to around £1 billion by 2015, at an operating margin of some six per cent, remains unchanged.
Construction services (excluding the Middle East)
The size of the UK market continues to reduce, primarily because of the substantial cuts being made by the UK Government to capital investment under its spending plans for the period 2010/2011 to 2014/2015. We therefore continue to re-scale our UK activities by being very selective in terms of the projects for which we bid. In the first half, we won a number of significant contracts, including a £45 million contract for the Highways Agency to upgrade the A23 between Handscross and Warninglid, a £45 million contract to reconfigure Pier 5 at Gatwick Airport, a £42 million contract for Argent in Manchester and Academy Schools contracts worth over £40 million. Over the medium term, we continue to expect new opportunities to come from the UK Government's £250 billion, five-year National Infrastructure Plan, of which up to some 70 per cent is to be privately financed. In Canada, the medium-term outlook for growth remains strong and supports the objective we announced in 2010 of doubling our total revenue in Canada to around £1 billion by 2015. We continue to expect significant opportunities for growth to come primarily from private finance projects, notably Infrastructure Ontario's C$35 billion AFP programme, referred to earlier in this statement. The launch of this new programme is expected to lead to major bidding activity in Canada in 2012 and 2013. First-half construction revenue in Canada is expected to remain at a broadly similar level to that in 2011. Overall, first-half revenue in this segment is therefore expected to reduce, due to re-scaling our UK activities. However, the re-scaling of UK construction through strict contract selectivity continues to support margins and we expect an increase in operating margin in this segment to more than offset the effect of lower revenue, with a consequent improvement in operating profit, at both the half and full year.
Despite market conditions remaining challenging, we are on track to deliver full-year results in line with expectations. Furthermore, given the strength of our business model, order book and pipeline of contract opportunities, our medium-term targets remain unchanged, namely to deliver ongoing growth in support services and to double our annual revenues in the Middle East and in Canada in the five-year period to 2015, in each case to around £1 billion.
(1) Before intangible amortisation, non-recurring operating items and non-operating items.