Interserve (IRV) is the latest UK firm to feel the wrath of investors following another profits warning amid further problems at its Energy for Waste (EfW) business. That it’s disappointed shareholders again is not the surprise, what is telling is the market’s brutal reaction.
In a short, unscheduled trading update Thursday, the former £1 billion support services and construction company said full-year results will be “significantly below” management’s previous expectations following “disappointing” UK trading during July and August in both divisions.
It was a real baptism of fire for new boss Debbie White, forced to watch Interserve’s market value halve to barely £100 million after just a fortnight in the job, as the shares crashed to new low at 67p.
In a second blow, the company warned that final costs from exiting its EfW business will “significantly exceed the £160 million currently provided”. That figure had already been revised up in February from £70 million initially. Numis Securities now estimates a total provision of around £190 million, in line with fellow broker Liberum.
Numis reduced its forecast for underlying pre-tax profit in both 2017 and 2018 by 24% to £78 million and £88 million respectively. But forecast full-year average net debt of £475-£500 million and significant pension liabilities also cast a dark cloud over Interserve, and there’s often talk it may need to raise money. That this remains a risk makes the savage reaction more understandable.
Seymour Pierce notes that Interserve had expected “a potential ‘hockey stock’ recovery” in support services and anticipated an improvement in the market. It’s been impacted by a shortfall in higher-margin discretionary work, though, which will continue into the second half. “We therefore model the H1 EBIT run-rate continuing for the full-year and into 2018.”
Liberum said ‘sell’ back in February, but had moved to ‘buy’ ahead of the warning. Still, analyst Tom Musson sticks with that view, arguing that “Interserve trades on a price/earnings ratio of 2.8 times and our sum of the parts [target price] is based on recovered multiples of 4 times EV/EBIT for Construction and 6 times for Support Services”.
While Interserve believes it can continue to operate within its banking covenant levels, the prospect of an equity raise, which has long been predicted, is back on the table. All told, since a 1 April 2014 peak at around £7.50, Interserve has lost 90% of its value.
It’s not the first outsourcer to warn on profits lately, among them Carillion (Carillion (CLLN)), Mitie (Mitie (MTO)), Capita (Capita (CPI)), and G4S (GFS).
Against a backdrop of Brexit-related economic uncertainty and weak government spending, risks remain. However, broker UBS said recently it thinks that 2018 could be an inflection point. We’ll see.
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