July 10, 2017 / 12:12 PM / a month ago

Short sellers reap dividend of Carillion's profit warning

July 10 (Reuters) - British construction services firm Carillion's profit warning, CEO departure and dividend suspension will not have surprised many funds who saw "short" bets on its stock pay off.

Paper profits for short sellers on Monday were nearly $90 million after Carillion shares fell by more than 35 percent, Reuters calculations show.

Carillion was the most heavily shorted stock on the London market according to disclosures from Britain's Finiancial Conduct Authority, with "significant" shorts -- bets amounting to 0.5 percent or more of outstanding shares -- accounting for more than a quarter of its shares at Friday's close.

Short-sellers, who sell borrowed shares, hoping to buy them back at a lower price and pocket the difference, have long targeted Carillion and Britain's outsourcing sector because of escalating costs on long-running contracts and a tough economic backdrop for several of the firm's customers.

At the end of last week, some 17 funds had short positions on Carillion, totalling more than $270 million.

A build-up in accounts receivables - or money owed to the company by clients - along with a burgeoning pension deficit and a bloated balance sheet have soured sentiment on Carillion.

"They have been expanding regularly over time beyond levels that are normal for the industry and there was the major red flag that got us excited about this short two years ago," Adrien Brus, an investment analyst at Naya Capital said.

"This is a sign that they are recognising revenue in excess of the cash that they are collecting," Brus, whose hedge fund was short Carillion shares, added.

As of the end of last year, Carillion's accounts receivables stood at $1.6 billion, more than double its market value on Monday, according to Thomson Reuters data “Short interest itself remains very high so the sceptics are strong, and that is borne out in the profit warning,” said David Lewis, an analyst at Markit, which tracks short-selling.

Some of the bearish bets on Carillion are long-standing.

Marshall Wace first disclosed a 0.51 percent short position in May 2013 and has the largest short bet against Carillion's peer Mitie, which issued three profit warnings in four months in late 2016 and early 2017.

Marshall Wace did not respond to calls for comment.

Carillion's peers also suffered losses, with Balfour Beatty shares more than 3 percent lower, while Serco slipped by 2 percent.

Muddying the outlook for Carillion, a slide in oil prices this year has worsened the operating environment for many of its clients, making cash recovery harder still.

And with an already stretched balance sheet, any equity capital raising is likely to dilute existing shareholders.

Editing by Vikram Subhedar and Alexander Smith

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