Carillion: now £50m a year of cost savings from Alfred McAlpine

Carillion is making £50m a year of cost savings as a result of the further integration of its former rival Alfred McAlpine, rather than the annual savings figure of £40m that was previously anticipated.

Much of the difference is coming thanks to the successful outsourcing and off-shoring of McAlpine’s former back-office functions.

That process got under way in June and was completed at the end of October.

This work is let to Accenture and Accenture then undertakes the tasks in its office in India. The potential cost savings run to 70% and are already hitting a figure of more than 50%.

After issuing a trading update this morning, finance director Richard Adam said that Carillion’s huge orderbook worth a total of £20bn “gives us confidence as we look forward”.

Adam said profit in the current year will show a double-digit increase over 2007.

With money flowing in rapidly, net borrowings (taken to an all-time high through the acquisitions of Mowlem and McAlpine) should be down to £275m by the end of the year. This is comfortably below the previously announced target figure of £300m.

A recent bonus has been that negotiations with Inland Revenue have resulted in Carillion getting the all-clear for trading losses that were still standing in McAlpine’s books at the time of the acquisition to be pooled with the profits in Carillion’s on-going work.

When you acquire a company you can’t assume this will prove agreeable to the Revenue, explained Adam.

Carillion has been flying in its fast-growing operations in the Middle East where a 6% profit margin is the order of the day, but have global worries eaten into prospects for the region?

“We still aim to double our revenue (i.e. turnover) by the end of 2009. We had a figure of £300m in 2007 and I would still see us hitting the £600m target.

“The focus has moved onto Abu Dhabi and away from Dubai where the market has cooled from super-growth to moderate expansion. In Abu Dhabi, we had no employees there at the start of the year but we now have 6,000 with most of these being on our sites,” he said.

UK construction is generating a profit margin of 1% and the Middle East construction a figure of 6%.

The plan is to hit an overall figure of 3% in the medium-term. So what is the target for the UK? Adam ducked the questions. “We believe we will improve,” he replied.

Business performance:

Support services

Support services continues drive growth and accounts for over 50% of group profits. The operating margin is also expected to increase, within a target range of 4%-5%, largely due to the effect of integration cost savings.  

New order intake stays strong and the firm said: “we continue to have our largest ever pipeline of opportunities for new contracts”.  

Public Private Partnership (PPP) projects

A further six investments in mature projects were sold for £60m.

Carillion has now sold a total of 23 mature investments in PPP projects over the last five years, generating cash proceeds of £180m and a pre-tax profit of £100m.  

During 2008, Carillion achieved financial close or preferred bidder positions on four further projects in which it expects to invest £11m of equity. 

Carillion has a further eight projects for which it is shortlisted. 

Middle East construction services

Increasingly driven by Abu Dhabi, where Carillion negotiated substantial new work in 2008 worth over £1bn and also increased the pipeline of potential opportunities.    

Construction services (excluding the Middle East)

Vanbots Group, a construction management services group in Canada bought in October, is being integrated to plan. This deal has enhanced Carillion’s ability to provide fully integrated solutions, especially for PPP projects, in Canada, particularly in the health sector.