Interserve serves up mixed results, keeps full year targets

Support services and construction group Interserve reported first-half profits down a third on last year but better than many were expecting amid difficult conditions in its markets.

Revenues in the first half of the year were stable at £1.65bn, up 1% year on year, though underlying operating profits fell 28% to £46.1m £64.3m and underlying profit before tax shrank 34% to £36.5m.

Support services volumes were solid good but profit margins were under pressure amid higher operating costs driven by increased regulation.

The construction division lost money as tough market conditions continued, but management have taken action in the UK and reported this was "gaining traction" though results were hit by under-performance on a small number of contracts.

Attempting an exit form the Energy-to-Waste business, Interserve reported progress "on all projects" and said the £160m accounting provision taken in 2016 was felt to remain "appropriate, although significant risks and uncertainties remain".

Connected with the EfW exit, net debt stood at £387.5m and for the full year average net debt is expected to be in the range £475-£500m.

House broker Numis predicted year end net debt will be £401-421m and believes the risk profile in EfW area is reducing, "though rising net debt in 2017 associated with this may confuse the issue in the short term but should not be taken out of context" as this is seen as "a management decision to enable maximum recoveries of monies from insurance claims rather than being prepared to accept lesser recoveries".

Statutory PBT swung to £24.9m from a loss of £33.8m this time last year, with reported earnings per share of 14.8p and underlying EPS of 21.5p down from 32.3p last time.

Headline numbers exclude a number of non-statutory measures, including most notably in the period £11.4m of amortisation of acquired intangible assets and £11.9m of finance costs.

Chief executive Adrian Ringrose, who along with his CFO will step down in September when new CEO Debbie White takes over, said the board expects the restructuring and cost reduction measures taken in recent months to benefit both divisions' performance during the second half of the year.

Chairman Glyn Barker, who was appointed in January last year, said he expects actions taken in the first half, both in UK construction and support services to lead to a better performance in the second half.

"In the Middle East, we see the outlook in the region as broadly favourable, notwithstanding the potential impact on general economic activity in the region of continuing political tensions between Qatar and other GCC states.

"Construction International has made good progress, while the actions we have taken to reduce our cost base in Support Services International has created a smaller but more resilient business.

"We expect our global Equipment Services business will continue to perform well in the second half of the year."

Interserve has a strong future workload of £7.1bn, allowing more than 95% visibility of 2017 consensus revenues, boosted in the year by contract wins in support services and a narrower market focus in UK construction, with notable contract wins in the period including with the Defence Infrastructure Organisation, Ministry of Justice, Network Rail, BT, Stagecoach Group and Musanada in Abu Dhabi.

Shares in Interserve slumped below 210p in early trade on Wednesday before levelling off as the afternoon approached.

Broker N+1Singer the expected net debt average, "illustrates the problems the group now has and they need to get that level down significantly" but acknowledged that the company is winning business and kept full year guidance unchanged. "Looks like needs an equity issue to me to get the debt down," said equity sales partner Jamie Constable.

Analyst Howard Seymour at Numis said the EfW issue remains the "key focal point" and said news that the Derby Waste Treatment Centre is now at testing phase is important - "as in our view this is the contract with the greatest risk profile".

He added that with regard to net debt, it was "important to note that this is a timing issue and does not reflect a worsening of the project position. We expect 2017 to be the peak of net debt as settlement occurs from 2018 onwards."

EfW aside, Seymour felt the group is operating in differing markets across all divisions "but we believe management actions are taking effect in difficult areas while good performers will maintain their performance".