Interserve swings to loss, though hints at underlying recovery

Interserve swung to a first-half loss of £6m from a profit of £24.9m a year ago, though underlying profits at the construction and outsourced services group were improved on the second half of last year.

On turnover down 10% to £1.49bn in the six months to 30 June, Interserve produced an operating profit before exceptional items of £40.1m, which was down 29% year on year but up from the £11.5m in the second half of last year.

More than £31m of finance costs from the securing additional debt facilities and revising the pricing on old facilities resulted in an adjusted pre-tax profit of £9m, falling 81% year-on-year.

The company has now mostly exited from its troublesome Energy-from-Waste business, saying progress in the half had been "in line" with management's expectations. "Although risks to the programme still remain we are focused on the completion and commissioning of all sites in the second half."

Interserve is being investigated by the Financial Conduct Authority's enforcement division over its handling of inside information and its disclosures to the market over its troublesome exit from the efw business.

Net debt at the half-year was £614.3m, which was up from £502.6m as expected.

A succession of profit warnings last year culminated in Interserve warning in October that it could breach its banking terms, with newly arrived chief executive Debbie White agreeing a refinancing deal in order to provide the firm with cash facilities of around £196m and bonding facilities of up to £94.5m to guarantee construction projects as part of total committed borrowing facilities of £834m through to September 2021, with the refinancing approved by shareholders in April.

Alongside Tuesday's interims, White said her new management team "took actions to bring stability to the business and agree the direction of the group's future strategy", with her 'Fit for Growth' initiatives delivering "material cost savings" expected to reach £15m this year and should result in a "simpler, more focused and more effective" group. The refinancing that we completed in April provides a firmer financial footing from which to execute these plans.

She said she believed the benefit of the actions taken in the first half underpin unchanged full-year expectations.

Interserve shares fell 4% to 69.05p on Tuesday.

Broker Peel Hunt said adjusted PBT of £9m was below its £1m forecast but was impressed by the significant EBITA improvement versus the second half of last year, up £11.5m to £40.1m.

Analysts maintained their full year PBT forecast of £34.0m and EPS 16.3p, versus the consensus forecast of £31.5m, seeing net debt coming down to £599m by the end of December.

"Shares trading on 4.4x Dec18E EPS fail to reflect the opportunity to drive improved returns and a de-risked investment case," was Peel Hunt's take.

Neil Wilson at Markets.com said: "Interserve’s half year numbers suggest that while management is confident its Fit for Growth restructuring is working, the numbers look decidedly skinny."

While the Fit for Growth cost savings are a positive and operating profits were on the up sequentially, "otherwise it’s not a pretty picture", with net debt significantly exceeding the market cap of the group.

"The Energy from Waste contract may be exited but it remains an albatross around its neck," he said, seeing "skinny margins suffering further malnourishment".