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Interserve’s future is down to fine margins

David Price

Today was a big day for Interserve.

It was its first complete half-year under chief executive Debbie White, its first accounts since securing a £834m refinancing lifeline, and the first results since its huge £244m loss for 2017.

Did Ms White and her chief financial officer Mark Whiteling defy the odds, put Interserve back on course and silence critics of the 125 per cent bonuses they received after just a few months in their posts?

Not exactly: the company reported a £6m pre-tax loss for the first half of 2018.

Its underlying operating profit, excluding one-off items, also slumped 29 per cent compared with the same period of 2017 to £40.1m.

Interserve is a huge operation, one which the current management admitted has a number of inefficient systems and problem contracts.

Turning such a business around was never going to be completed in the 10 months Ms White has been in her post.

Today the CEO said progress had been made in the problem areas of EfW, divisional profitability and debt, but each came with a caveat that took the shine off the improvements.

The company’s four remaining EfW plants are on course for handover by the end of 2018, but both Ms White and Mr Whiteling made clear this would not necessarily mark the end of the story.

Interserve will bear liability for certain issues that could arise from the commissioning and operation of the plants beyond 2018.

The hope Ms White voiced in April that the EfW saga would be “done” by the end of the year looks to be in the dust.

Another burden that will weigh on Interserve for some time is, of course, debt.

The £834m refinancing finalised in April was needed to avert disaster, but whether it secured the company’s long-term future or just kicked the can down the road is still not clear.

Net debt stands at £613m and is not expected to be any lower than £575m by the end of 2018.

It’s important to remember that as part of its refinancing covenants, the company needs to pay off around £200m within the next two years.

If paying down this principal wasn’t hard enough, Interserve must also service the finance cost, which one analyst said today was higher than expected and will be around £80m for the whole year.

This needs to be covered largely by operating profit, which of course must also cover any further losses incurred on its EfW plants.

For this to happen the company needs its three divisions – construction, services and equipment – to all perform strongly.

So far this year they do not appear to have fared particularly well.

Revenue for all three divisions has fallen, which isn’t necessarily a bad thing if the work being done is more profitable.

But this hasn’t been the case for the first six months of the year, and operating margins are lower for every division than they were for the same period of 2017.

Today’s progress report looks like that of a company still dealing with significant problems from its past while trying to prepare for reckonings in its near future.

Falling margins – at a time when it needs to be as profitable as possible to pay down debt and cover potential future losses – does Interserve no favours.

Crunch time for Interserve may not be imminent, but the window for it to turn things around is closing – and today’s figures suggest there’s some way to go.

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