Strong Revenue Growth for Carillion
2015 PRE-CLOSE TRADING UPDATE
The Group's performance continues to reflect the consistent implementation of our successful strategy, which enabled us to rescale and reposition our business during the economic downturn in order to take advantage of opportunities for growth as market conditions improve.
In 2015, total revenue is expected to grow strongly, with the Group's operating profit in line with the guidance we gave at the half year. Overall, this is particularly pleasing, given that much of the work we are currently delivering was won during the economic downturn, and demonstrates the benefits of maintaining a selective approach to choosing the contracts for which we bid, together with our rigorous risk management processes, efficient centralised operating platform and ongoing cost reduction programmes. Profit will be less second-half weighted than in previous years, although we expect to revert to a greater second half weighting in 2016.
Operating cash flow remains strong and we continue to expect profit in 2015 to be fully cash-backed. Year-end net borrowing is also expected to be in line with previous guidance, with a potentially modest increase in net borrowing, compared with 31 December 2014, due largely to investments in business acquisitions and Public Private Partnership projects.
The Group has renewed its main revolving bank facility and extended the maturity date by nearly three years, from March 2018 to November 2020. The £790 million facility has also attracted reduced pricing across the board, which reflects the strength of the Group's credit standing. With total available funding of some £1.4 billion, the Group continues to have considerable financial strength to support our strategy for growth.
New order intake has continued to follow the expected profile, with the pace of contract awards in the UK beginning to pick up following the hiatus due to the UK General Election. The value of the Group's order book plus probable orders at the year end is expected to remain very strong at around £17 billion (31 December 2014: £18.6 billion), after subtracting £0.3 billion due to the sale of equity investments in Public Private Partnership projects. At the year end, revenue visibility for 2016 is also expected to remain high at around 80 per cent, despite the unavoidable effect of the UK General Election on contract awards in 2015. Furthermore, the Group's pipeline of contract opportunities is expected to increase at the year end to over £41 billion (31 December 2014: £39.2 billion).
Support services revenue is expected to increase significantly, which includes healthy organic growth together with contributions from bolt-on acquisitions. We expect to maintain the operating margin at a similar level to that in 2014, despite higher than usual contract mobilisation costs. This reflects the benefits of our strategy of growing support services activities organically and through bolt-on acquisitions in markets offering good margins, while maintaining a selective approach to the contracts for which we bid and a rigorous focus on our cost reduction and efficiency programmes. Our assessment of the short term impact of the National Living Wage (NLW) on direct employment costs remains unchanged. The potential wider effects due to its impact on UK businesses as a whole will inevitably remain uncertain until the NLW has been implemented.
Public Private Partnership (PPP) projects
Our portfolio of investments in financially closed PPP projects continues to perform well, with revenue and profit in this segment in line with expectations. During the year we have sold investments in mature PPP projects, generating cash proceeds that we can reinvest in new projects. We have also continued to win new PPP projects and since the half year we have been selected as the preferred bidder, or achieved financial close, on four projects in which we expect to invest up to £30 million of equity. At the year end, we expect the Director's valuation of our PPP investments to be broadly comparable with the 31 December 2014 valuation.
Middle East construction services
In Middle East construction services, we expect to deliver strong revenue growth, which, as previously reported, reflects an increase in the number of new opportunities coming to market and the phasing of the opportunities we have turned into secured orders. Also as previously announced, we expect the operating margin to be lower than in 2014, but we continue to expect the effect of this on operating profit to be broadly offset by revenue growth. To help mitigate any potential impact that a prolonged low oil price may have on our bid pipeline of new contracts, we continue to work with customers on opportunities to utilise UK Export Finance and also on the potential for Public Private Partnership projects to support their substantial investment programmes.
Construction services (excluding the Middle East)
In construction services (excluding the Middle East), we expect strong revenue growth, which also reflects our successful work winning performance in the UK in 2014, together with the phasing of these contract wins. In Canada, we continue to focus increasingly on construction work secured through winning Public Private Partnership projects. The operating margin continues to benefit from the selective approach we take to choosing all the contracts for which we bid. In 2015, we expect the margin to be around the top end of the 2.5 per cent to 3.0 per cent range within which we expect it to stabilise, in line with our long-standing guidance, and at a level above the industry average.
Although trading conditions in some of our markets are still recovering, we continue to see signs of improvement, especially in the UK. The Group's order book and pipeline of contract opportunities both remain strong, as does operating cash flow, which continues to enable the Group to invest to support our strategy for growth. Therefore, we believe the overall outlook remains positive and the Group continues to be well positioned to make further progress in 2016.
Carillion will announce its 2015 preliminary results on 3 March 2016.