Galliford Try ( GFRD) profit warning

[monabri]

I suspect a dividend cut is imminent.

https://www.londonstockexchange.com/exc ... 42048.html

Galliford Try plc, the housebuilding, regeneration and construction group, announces that it is undertaking a strategic review of its Construction business..........The review will reduce the size of the Construction business, focusing on its key strengths in markets and sectors with sustainable prospects for profitability and growth, where we have a track record of success. ......The review includes an assessment of operational progress and contract positions throughout the Construction business. The Board anticipates that this review will result in reduced profitability in the current year..."

Will they use this review to rebase the dividend?

Moderator Message:
Subject line amended to better reflect subject -- MDW1954

[kempiejon]

They rebased their interim and final last year, 2018 total was down from 86p to 74p and the most recent interim this year down from 25p to 23p and they've had a rights issue so they have form and could do it again but you'd think they' have worked it.

[daveh]

Off 20% according to the BBC. They do say that it is not going to increase net debt, so perhaps they won't need to cut the dividend (or perhaps they are taking account of a cut dividend in that statement). I guess we will find out more on completion of the review in a few weeks.

[Alaric]

.....The review includes an assessment of operational progress and contract positions throughout the Construction business. The Board anticipates that this review will result in reduced profitability in the current year..."

I suppose following Carillion and Interserve, they feel the need to check the accounting etc. on their contracts.

[AsleepInYorkshire]

I suspect a dividend cut is imminent.

https://www.londonstockexchange.com/exc ... 42048.html

Galliford Try plc, the housebuilding, regeneration and construction group, announces that it is undertaking a strategic review of its Construction business..........The review will reduce the size of the Construction business, focusing on its key strengths in markets and sectors with sustainable prospects for profitability and growth, where we have a track record of success. ......The review includes an assessment of operational progress and contract positions throughout the Construction business. The Board anticipates that this review will result in reduced profitability in the current year..."

Will they use this review to rebase the dividend?

Moderator Message:
Subject line amended to better reflect subject -- MDW1954

At the risk of repeating what's already been pasted but hopefully as a matter of some prudence I've copied the full statement below.

Galliford Try plc, the housebuilding, regeneration and construction group, announces that it is undertaking a strategic review of its Construction business.
The review will reduce the size of the Construction business, focusing on its key strengths in markets and sectors with sustainable prospects for profitability and growth, where we have a track record of success.
The review includes an assessment of operational progress and contract positions throughout the Construction business. The Board anticipates that this review will result in reduced profitability in the current year reflecting a reassessment of positions in legacy and some current contracts and the effect of some recent adverse settlements, as well as the costs of the restructure. The single largest element relates to the Queensferry Crossing joint venture, which has recently increased its estimated final costs on the project. With regard to the claim in respect of the completed Aberdeen Western Peripheral Route, and the previously disclosed £38m work in progress balance in respect of three contracts for a single client, our position is unchanged.
The Board expects that the outcome of this assessment will reduce the Group's full year post-exceptional profit before tax by £30m-£40m below the current consensus analysts' forecast1. The majority of our construction businesses continue to perform well, and these adjustments are not expected to have a significant impact on the Group's previous guidance on average net debt for the year.
The Board anticipates finalising its conclusions in the next few weeks and will share the detail of the review of the Construction business along with a further update on Group trading in its scheduled statement on 21 May 2019.

I am a QS with some 40 years experience. That doesn't make me an expert by any stretch of the imagination and all the usual caveats apply. A couple of things jump off the page for me.

1) The CEO is leaving to Crest Nicholson.

2) The statement identifies that GT is reviewing its Construction Business. I take this to mean that the review is not Group wide, albeit this could be nothing more than a semantic misinterpretation.

3) I am aware that GT have some legacy issues which I believe revolve mostly around their acquisition of Morrison Construction.

4) The reporting on the Queensferry Bridge contract has been [lamentably] inaccurate. Interpretation of that is a matter of opinion for the individual.

My "chimp" [reference to The Chimp Paradox ] is finding it difficult not to believe that there could have been an exagerated amount of hope in previous estimates of legacy costs with a resulting shortfall in statements made by the Board. There have been several opportunities for the Board to completely capture the full extent of the Queensferry Crossing costs and subsequently report this to shareholders. However, that is a matter of pure speculation and by far not a great way to take the conversation.

The six month Group statement signed off by the CEO (PEter Truscott) for December 2018 summarised the Group's performance. I've copied below an extract from this statement;

Construction

• Aberdeen Western Peripheral Route (AWPR) construction completed. First half exceptional costs of £26m from completion delays.
• Constructive dialogue with the client continues regarding significant and recognised claims. Financial statements include an estimate for these recoveries.
• Lower revenues reflect more cautious bidding and project deferrals owing to clients’ macro uncertainty.
• Pre-exceptional operating margin maintained at 0.9% (H1 2018: 0.9%) with encouraging performance on current projects.
• Solid, high-quality order book of £3.2bn7 (H1 2018: £3.5bn).

It would be interesting to review the forecast proifts for 2019 and evaluate the effect of a £40M write down to understand what impact this will have on yield.

I wonder if it is worth considering that GT have pursued growth without an appropriate risk management strategy?

I hold no GT stock.

AiY

[AsleepInYorkshire]

Subject to

1 ) Margin write down not exceeding £40M
2 ) Gross profits of £116M YE 2018-2019
3 ) A yield based on similar percentages as those previously issued

Dividend payment circa 64p per share

Highly speculative of course

AiY

[funduffer]

When I came to add a house builder to my HYP, I could have gone for the usual suspects of Berkeley, Persimmon or Taylor Wimpey, but I chose Galliford Try because it also was in the business of Construction as well as house building.

My thinking was diversification would mean if there was a downturn in house building, there was always the Construction side to compensate.

Oh how wrong was I!

It turns out the Construction side is the lemon, and the house building is the golden egg. (Yes,I held Carillion as well!)

Carillion, Keir, and now Galliford Try have all run into trouble with Construction, a sector I will avoid from now on.

You live and learn.

FD

[monabri]

GFRD said

"announces that it is undertaking a strategic review of its Construction business.

The review will reduce the size of the Construction business, focusing on its key strengths in markets and sectors with sustainable prospects for profitability and growth, where we have a track record of success. "

Looks like they've arrived at the conclusion of the review already....

My translation.."here's a heads up that more problems are about to be admitted to and we will say that the in depth review has unearthed them" ...If I was a major investor I'd call BS...and that's what they've done.

[AsleepInYorkshire]

GFRD said

"announces that it is undertaking a strategic review of its Construction business.

The review will reduce the size of the Construction business, focusing on its key strengths in markets and sectors with sustainable prospects for profitability and growth, where we have a track record of success. "

Looks like they've arrived at the conclusion of the review already....

My translation.."here's a heads up that more problems are about to be admitted to and we will say that the in depth review has unearthed them" ...If I was a major investor I'd call BS...and that's what they've done.

Hi monarbri,

You're right to have some cynical reservations. GT may have missed an opportunity to be more open about the situation on The Queensferry Crossing when it first came to their notice. They could have indicated the worse possible out turn and perhaps explaining any opportunities available to reduce this forecast. However, putting this information out into the public domain could have proven detrimental to their negotiations.

My own take on this comment, for what little it's worth, is that GT are now going out to their Commercial Teams and asking them to confess to any forthcoming losses they may well have been hiding. There is currently a shortage of QS's within the market place. Many construction companies have cited this as one of the most significant risks to both margin and growth. If there has been a churn of QS's within GT this may have undermined the flow of consistent and accurate information. It should also be born in mind that Project QS's are called upon to provide monthly Commercial Reports which will include their opinion on the top 5 risks and top 5 opportunities looking forward. Often all it takes for a contract to turn sour is one large risk to come to fruition and one large opportunity to be lost. This isn't a reflection on the reporting mechanisms or the opinion of the Project QS. It's the way contracting works.

In a previous post I suggested it may be worth considering that GT have probably underestimated legacy issues relating to their acquisition of Morrison Construction. I'm aware they also have legacy issues relating to their purchase of Miller Construction . In addition it may be worth considering that they may have been lacking a robust risk management structure regarding their planned growth in turnover.

Smaller contracts whilst yielding slim margins should reduce the risk burden moving forward. However, I can sit in my armchair and say that. In reality these kind of situations are far more complex and I think Graham Prothero the new CEO may be signalling his vision is to reduce construction turnover but actually increase margins by subsequently removing some of the huge burdens of risk associated with larger contracts. Building a batch of schools should be far less risky than building a new multi billion pound bridge. The estimators within GT will have a much greater certainty of understanding the cost base of a new school as such costs will be known from other contracts. However, a one off bridge will not be something the business does every day of the week and the estimators will be in "high risk" territory when it comes to understanding the costs of such a structure. Given the contract was taken on a fixed price basis this too may well have had a negative impact.

AiY
(QS)

[jackdaww]

When I came to add a house builder to my HYP, I could have gone for the usual suspects of Berkeley, Persimmon or Taylor Wimpey, but I chose Galliford Try because it also was in the business of Construction as well as house building.

My thinking was diversification would mean if there was a downturn in house building, there was always the Construction side to compensate.

Oh how wrong was I!

It turns out the Construction side is the lemon, and the house building is the golden egg. (Yes,I held Carillion as well!)

Carillion, Keir, and now Galliford Try have all run into trouble with Construction, a sector I will avoid from now on.

You live and learn.

FD

=============================

well done .

sadly many dont learn and pick any high yielder.

[AsleepInYorkshire]

When I came to add a house builder to my HYP, I could have gone for the usual suspects of Berkeley, Persimmon or Taylor Wimpey, but I chose Galliford Try because it also was in the business of Construction as well as house building.

My thinking was diversification would mean if there was a downturn in house building, there was always the Construction side to compensate.

Oh how wrong was I!

It turns out the Construction side is the lemon, and the house building is the golden egg. (Yes,I held Carillion as well!)

Carillion, Keir, and now Galliford Try have all run into trouble with Construction, a sector I will avoid from now on.

You live and learn.

FD

well done .

sadly many dont learn and pick any high yielder.

If I may venture my opinion for what little it's worth. I've been watching the Galliford stock price from a totally contrarian view. I've reflected upon their business model. It's not unique but there are only a minority of other companies with similar models.

Strengths
1) Blended margins are protected through diversification
2) No diversification into "service sector" areas such as waste contracts

Weakness'
1) Margins are blended with subsequent reductions due to diversification
2) Diversification into large infrastructure contracts with fixed price revenues

There is also a long term issue that should bring benefit. As interest rates rise this model should produce a healthier margin, albeit blended. Many construction contracts will, if they are planned and run correctly, produce windfall cashflow profits. Such can be used to support the massive cash input needed by their house building arm Linden Homes.

I don't think that Galliford can be compared to Carillion, Interserve or Kier. They have all faltered due to completely different reasons. It should also be noted that construction and house building are typically cyclical and the house builders are "possibly/probably" at the top of their cycle. It was only 10-11 years ago that no one would touch a house building stock.

Graham Prothero the new CEO does have a difficult time ahead though. His problems will be

1) Skills shortages
2) Delays in releasing contracts from Government whilst they work through Brexit.
3) Supply chain price pressures
4) Competition from smaller companies at local level
5) Maintaining a robust balance sheet

I can't predict how Gallifrd will attempt to deal with any of these issues.

I do, however, see some upside in their business model and I don't think a radical change is coming. I could be wrong though. I think they will simply remove their feet from the large infrastructure world and settle for something much more boring. But safe.

AiY

[IanTHughes]

I did not buy into Galliford Try (GFRD) but I am interested in learning any lessons that I can which might assist me when making future selections.

The last results to be published by GFRD were the Interim Results for the Year Ending 30 Jun 2019.

https://otp.tools.investis.com/clients/ ... id=1232782

Group
· Strong group underlying performance producing record pre-exceptional profit, with continuing progress against our strategic objectives across the Group.
· 3,069 total new homes completed by Linden Homes and Partnerships & Regeneration (H1 2018: 2,878).
· Net debt reduced to £40m (H1 2018: £85m), with average net debt decreasing to £126m (H1 2018: £203m).
· Interim dividend of 23.0p declared (H1 2018: 28.0p), in line with 2.0x cover policy.
· Increased total sales currently reserved, contracted and completed of £1,097m7 (H1 2018: £1,008m) and a current Group order book of £5.4bn7 (H1 2018: £5.6bn).

Construction
· Aberdeen Western Peripheral Route (AWPR) construction completed. First half exceptional costs of £26m from completion delays.
· Constructive dialogue with the client continues regarding significant and recognised claims. Financial statements include an estimate for these recoveries.
· Lower revenues reflect more cautious bidding and project deferrals owing to clients' macro uncertainty.
· Pre-exceptional operating margin maintained at 0.9% (H1 2018: 0.9%) with encouraging performance on current projects.
· Solid, high-quality order book of £3.2bn7 (H1 2018: £3.5bn).

Peter Truscott, Chief Executive, commented:
"Galliford Try has delivered a strong financial and operational performance in the first half, with further progress against our 2021 strategy. The Group is well capitalised and average net debt is below previous guidance, driven by focused working capital management over the period.
…………………..
Construction's performance continues to be encouraging, particularly on newer contracts, reflecting the business's careful approach to project selection and risk management. We continue to prioritise the quality of each opportunity over volume. We are seeing projects deferred as a result of macro uncertainty, but with 96% of revenue secured for the current financial year and 66% secured for the following year the business has confidence in its prospects.

The Group enters the second half of the year with a solid foundation, underpinned by a strong balance sheet and our focus on high-quality earnings which will drive further margin improvements over time. Our mix of residential development creates a robust proposition in more uncertain markets. We remain cautious of the impact of the current political uncertainty on consumer and business confidence, and the medium-term outlook for the macro economy, but believe our focused strategic objectives, strong order book and disciplined approach will deliver a full year out-turn toward the upper end of the analysts' current range8."

Note that “Construction” is reported as “encouraging”

Only one warning flag as far as I can see, although it is a big one for HYP, the decreased interim dividend, of which more later. But apart from that, albeit only based on the short summaries, these results on the face of it look fairly strong.

Next we go back to last Full Year Results for the Year Ending 30 Jun 2018.

https://otp.tools.investis.com/clients/ ... id=1180176

Group
· Very strong underlying performance reflecting excellent progress made against strategy to 2021
· 6,193 total new homes built by Linden Homes and Partnerships & Regeneration (2017: 5,490)
· Sales order books in Linden Homes and Partnerships & Regeneration robust at £698m (2017: £638m)
· Successful 1 for 3 rights issue in April 2018 resulting in net proceeds of £150m
· Average net debt at £227m (excluding the rights issue proceeds)
· Full year dividend payment of 77.0p (2017 restated: 86.0p), covered 2.0x by pre-exceptional profits in line with policy announced at the rights issue
· Pre-exceptional return on net assets improved to 29.2% from 27.5%
· On track to achieve Group 2021 strategic targets with adjustments to divisional targets

Construction
· Pre-exceptional margin improved to 0.9%, on revenue of £1,687m (2017: 0% and £1,527m respectively)
· £26m net debt (2017: net cash £137m), reduction primarily reflecting cash funding of Aberdeen Western Peripheral Route (AWPR)
· Good progress on the AWPR contract, with the vast majority of the road complete, significant sections already opened to traffic and final completion expected in late Autumn. Construction result impacted by exceptional charge of £45.0m from the contract, in line with earlier guidance
· £3.3bn9 risk managed high-quality order book (2017: £3.6bn)

Peter Truscott, Chief Executive, commented:
"We have delivered a very strong underlying performance during the year, driven by excellent progress towards our strategic objectives across all three businesses.

……………………..………

The underlying Construction business performed well and continues to see a pipeline of suitable opportunities, with new projects delivering improved margins. We have made good progress towards completion of the AWPR contract, with significant sections of the road open to traffic and the final section expected to be open by late Autumn 2018.

The rights issue in April has strengthened the balance sheet and ensures that the Group's businesses are well positioned, with the appropriate capital, to deliver on their respective growth opportunities in line with our Strategy to 2021."

Ah, the rights issue. Is that a clue to the reduced Interim Dividend? Well yes, but only in part. According to Dividend Data the adjusted Interim for Year Ending 30 Jun 2018 is 25.19p as opposed to the 28p that was reported in the latest Interim Results.

https://www.dividenddata.co.uk/dividend ... ?epic=GFRD

Also, as well as a second warning flag - the recent Rights Issue – a third warning flag is the reduced Annual Dividend from an adjusted value of 86.37p for the Year Ending 30 Jun 2017 to 77p for the Year Ending 30 Jun 2018

As I said, I never bought into GFRD and in fact I have never checked into any prior results before now, not least because I did invest within the same Business Sector by way of Persimmon (PSN) – FTSE100 - and Crest Nicholson (CRST) - higher yield at the time (I think).

However, from the time of publication of the final results for the Year Ending 30 Jun 2018, not to mention the Rights Issue in April of 2018, I think if I had reviewed GFRD it would not have been selected for HYP, despite the “Strong” results being reported by the company.

I know, very easy to say with the benefit of hindsight. But can anyone point me to anything that I am missing that made GFRD a suitable candidate for HYP, at any time after the Rights Issue for April 2018 was announced?

In conclusion I should add that, although I did miss this particular banana skin, I had a full holding of Carillion PLC (CLLN) and I am still holding what was once about a half holding of Kier PLC (KIE) – much less than half now . You win some you lose some I guess.


Ian

[TUK020]

As a result of the Carillion debacle, I spent time looking for early warning signs that the wheels were about to come off.

Key point that I noted was that the short sellers market was very acTIVE (Carillion had 15% of its stock shorted).
Galliford Try has 1 player shorting 1.4% of its stock, and this is way down the tables (below VF at 3.3%).

Indicates that there is not yet any significant group who think this is unsustainable
TUK020

[IanTHughes]

In my previous post I said:

But can anyone point me to anything that I am missing that made GFRD a suitable candidate for HYP, at any time after the Rights Issue for April 2018 was announced?

Once the Rights Issue was on the cards, along with a dividend reduction, GFRD was clearly not an HYP candidate, or at the very least an HYPer would be on notice as to the heightened risk with regard to future dividends. However, it occurs to me that the real question should be:

Were there any warning signs before the Interim Results for the Year Ending 30 Jun 2018, released on the 14 Feb 2018? Looking at the dividend record, rising for several years, up to and including the Final Results of the Year Ending 30 Jun 2017, it is quite easy to see how an HYPer would have been persuaded to at least put GFRD on a short list.


Ian

[dspp]

In my previous post I said:

But can anyone point me to anything that I am missing that made GFRD a suitable candidate for HYP, at any time after the Rights Issue for April 2018 was announced?

Once the Rights Issue was on the cards, along with a dividend reduction, GFRD was clearly not an HYP candidate, or at the very least an HYPer would be on notice as to the heightened risk with regard to future dividends. However, it occurs to me that the real question should be:

Were there any warning signs before the Interim Results for the Year Ending 30 Jun 2018, released on the 14 Feb 2018? Looking at the dividend record, rising for several years, up to and including the Final Results of the Year Ending 30 Jun 2017, it is quite easy to see how an HYPer would have been persuaded to at least put GFRD on a short list.


Ian

Even in those Interim Results would a Doris have been alert enough to not buy ?

- dspp

[IanTHughes]

In my previous post I said:

But can anyone point me to anything that I am missing that made GFRD a suitable candidate for HYP, at any time after the Rights Issue for April 2018 was announced?

Once the Rights Issue was on the cards, along with a dividend reduction, GFRD was clearly not an HYP candidate, or at the very least an HYPer would be on notice as to the heightened risk with regard to future dividends. However, it occurs to me that the real question should be:

Were there any warning signs before the Interim Results for the Year Ending 30 Jun 2018, released on the 14 Feb 2018? Looking at the dividend record, rising for several years, up to and including the Final Results of the Year Ending 30 Jun 2017, it is quite easy to see how an HYPer would have been persuaded to at least put GFRD on a short list.

Even in those Interim Results would a Doris have been alert enough to not buy ?

'Doris' was only interested in receiving and living off the dividends. She never sold or purchased anything having simply inherited a bunch of share certificates from her father/mother/husband/brother.

But I was asking a serious question. Was there anything, before the Rights Issue and reduced Interim Dividend was announced, that indicated both were about to happen?


Ian

[tjh290633]

Once the Rights Issue was on the cards, along with a dividend reduction, GFRD was clearly not an HYP candidate, or at the very least an HYPer would be on notice as to the heightened risk with regard to future dividends. However, it occurs to me that the real question should be:

Were there any warning signs before the Interim Results for the Year Ending 30 Jun 2018, released on the 14 Feb 2018? Looking at the dividend record, rising for several years, up to and including the Final Results of the Year Ending 30 Jun 2017, it is quite easy to see how an HYPer would have been persuaded to at least put GFRD on a short list.


Ian

That's fine as long as it is not extrapolated to say that a rights issue is a sign of a warning not to select the share for an HYP. I am juast minded of the time when Segro had a big rights issue to buy Brixton Estates in 2009, 12 for 1 because they had to reduce the nominal value of each share, followed by a 10 to 1 consolidation. They had an Open Offer at the same time, after consolidation, and subsequently had another rights issue in 2017.

Some might have thrown their hands in at the outset, but I have to say that following through has given a decent result.

TJH

[IanTHughes]

Once the Rights Issue was on the cards, along with a dividend reduction, GFRD was clearly not an HYP candidate, or at the very least an HYPer would be on notice as to the heightened risk with regard to future dividends. However, it occurs to me that the real question should be:

Were there any warning signs before the Interim Results for the Year Ending 30 Jun 2018, released on the 14 Feb 2018? Looking at the dividend record, rising for several years, up to and including the Final Results of the Year Ending 30 Jun 2017, it is quite easy to see how an HYPer would have been persuaded to at least put GFRD on a short list.

That's fine as long as it is not extrapolated to say that a rights issue is a sign of a warning not to select the share for an HYP. I am juast minded of the time when Segro had a big rights issue to buy Brixton Estates in 2009, 12 for 1 because they had to reduce the nominal value of each share, followed by a 10 to 1 consolidation. They had an Open Offer at the same time, after consolidation, and subsequently had another rights issue in 2017.

Some might have thrown their hands in at the outset, but I have to say that following through has given a decent result.

I have not investigated the reason for the Rights Issue but I do agree that, if capital is being raised for a profitable venture then no, it is not on its own a red flag for an HYP. And it certainly is not a sign for a current holder to ditch the shares. No, if I was to go back in time and look at GFRD with a view to a purchase, the dividend decrease would have warned me off but, without that cut, the Rights Issue would have been further investigated before making a decision.


Ian

[Dod101]

The main warning sign for me is that GT is a contractor. Shunning contractors means that I have avoided the various problems in that sector. And that is a perfectly serious statement. Contractors are bad news and will remain so even if they tighten up a bit in the short term. No doubt they will revert to type. Does not matter about their dividend record, shorting or anything else.

Dod

[IanTHughes]

The main warning sign for me is that GT is a contractor.

As a matter of fact, Galliford Try (GFRD) is a Construction and House Building Company.


Ian