Peel Hunt downgrades Interserve to 'reduce'

Peel Hunt has downgraded construction and support services group Interserve to 'reduce' from 'hold' and chopped its price target to 200p from 250p saying the new chief executive has lots to do and not much time to do it in.

Earlier this month, Interserve announced that Debbie White will replace Adrian Ringrose as CEO with effect from 1 September.

The brokerage said the challenges facing the new CEO are significant, but with her support services/finance background, there must be a temptation to radically refocus the group.

Peel said "surgery" is required to strengthen the balance sheet and position the company for higher quality earnings growth, but it added that given the continuing risks from waste to energy and the growing debt burden, the window for proactive change is limited.

"In our view, the valuation support provided by Equipment Services is not compelling enough to offset the risks (many beyond management’s control)."

Peel Hunt highlighted the group's debt issues, noting the market cap is £334m and FY2017 peak net debt is expected to be £485m.

In addition, it said the principal earnings/balance sheet risk still rests with the energy from waste contracts, namely Glasgow and Derby. Peel argued that the £160m provision relies on certain recoveries and assumes the process technologies will work.

"We believe that it could be at least 12-18 months before any real clarity can be provided on the provision, but our experience would suggest that there is still a risk of material increases."

In February, Interserve said the cost of exiting its troubled energy from waste projects had risen from £70m to £160m.

At 1045 GMT, the shares were down 5% to 222p.