(Reuters) - The chief executive of Britain’s Carillion quit on Monday as the building and support services group warned on full-year profit and said it was pulling out of three construction markets in the Middle East.
Carillion shares plunged 35 percent to trade at 124 pence by 1200 GMT, having earlier hit their lowest level since April 2003.
The firm, which helps maintain British railways and roads, said payment problems on four construction contracts nearing or reaching completion had forced it take a provision of 845 million pounds.
Carillion had also seen costs escalate on other projects, sometimes due to design changes, taking a particular hit on public partnership contracts with governments where prices are set ahead of time.
“It has been a perfect storm that these contracts have gone wrong at the same time and because they were all large contracts the compounding effect becomes very material,” Keith Cochrane, who was appointed as interim CEO, told analysts.
Announcing that Chief Executive Richard Howson was stepping down, Carillion asked non-executive director Cochrane to take charge while it seeks a permanent successor. Cochrane is a former boss of Scottish engineering company Weir Group.
The firm said to conserve cash it would suspend dividends for 2017 -- saving it 80 million pounds -- and would exit its UK partnership contracts as well as construction work in Qatar, Saudi Arabia and Egypt.
However, average net borrowing in the first half of the year has risen to 695 million pounds from 586.5 million over 2016.
The company plans to update investors in September on a review of its business and capital structure.
The British government has been seeking to support companies such as Carillion to help them to win overseas international contracts.
Last week, the government announced that UK Export Finance (UKEF) would provide $180 million to Carillion to design and build the latest phase of “One Central”, Dubai World Trade Centre’s new development in Dubai’s central business district.
The UK government remained “committed to supporting Carillion and other firms in the UK’s world-leading construction sector as they trade abroad,” a spokeswoman said.
Carillion shares were among the most heavily shorted across the British market with hedge funds including Marshall Wace and Naya Capital reporting sizeable bets on them falling, according to FCA disclosure data. [L4N1K12YZ]
Analysts said the company might have to ask investors to contribute to a capital raising.
“Carillion looks like it’s trying to bail out a supertanker with a soup spoon,” said Nicholas Hyett, equity analyst with Hargreaves Lansdown.
“...Talk of a review of capital structure, and the ongoing debt problem, will leave investors worried that a significant rights issue could be on the horizon,” he added.
The problems at Carillion have echoes of those at Balfour Beatty, the UK construction peer that Carillion had previously tried to take over.
Balfour spent two years overhauling its operations after work undertaken at lower margins led to multiple profit warnings that forced it to scrap its 2015 dividend, among other measures.
Winning new contracts has become harder for Carillion as spending in the Middle East adjusts to lower oil prices, and the firm has also experienced some delays in UK public spending decisions since Britain voted to leave the European Union.
Three partnership projects in Britain accounted for 375 million pounds of the provision, but the bulk related to markets in the Middle East and Canada, the company said, forecasting future cash outflows of 100-150 million pounds for the contracts.
“The challenges of doing business in the Middle East is not just in terms of (cash) collections... but also that customer dialogue has very much come to the fore,” Cochrane said.
Carillion said on Monday it had decided to not pursue any more partnership construction contracts. For other types of work, it said it would only take on future construction work on a highly selective basis and via lower-risk procurement routes.
The firm now expects revenue of 4.8 billion to 5 billion pounds for 2017, it said, down from 5.2 billion pounds in 2016.
Its overall performance was expected to be below management’s previous expectations.
Reporting by Esha Vaish in Bengaluru; editing by Jason Neely/Keith Weir