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5 things we learned from Interserve's results

Interserve finally reported its long-awaited annual results today, which revealed a £244m pre-tax loss.

The Berkshire-based contractor’s net debt also ballooned to £502.6m, from £274.4m the prior year.

The results come just days after Interserve signed off on a refinancing package having agreed a deal with its lenders. Investors also agreed a £1bn borrowing cap.

So what else did we learn?

Leaders facing down problems

Mindful perhaps of the way Carillion’s directors mishandled its crisis, Interserve’s top brass were today extremely straight-talking over the firm’s difficulties. 

Chairman Glyn Barker admitted that much of Interserve’s problems are due to “self-inflicted mistakes of the past”. He added: “The resulting stress and uncertainty have led to anxiety amongst our staff, suppliers and customers and significant loss of value for our shareholders from the fall in our share price.”

But he admitted there is still plenty of hard work ahead to tackle the problems.

Chief executive Debbie White was similarly frank when addressing analysts. When she took over the business last September, she said it was “unclear what the business wanted to be” and there had been “some poor decisions”. She said the organisation was “enormously inefficient”, there were “disjointed systems and management processes”, and suffered from “limited visibility at group level of operating performance”.

However, Applied Value analyst Stephen Rawlinson thought the messages here were fairly predictable. “The release contains all of the standard stuff to be expected about criticising the past but now moving on to better things with new management,” he said.

Interserve_Viridor_Glasgow Recycling and Renewable Energy Centre

Interserve_Viridor_Glasgow Recycling and Renewable Energy Centre

Energy-from-waste – out of the woods?

Interserve’s disastrous foray into the energy-from-waste market has been the cause of much of the firm’s problems.

The firm reported a £160m loss from the sector in 2016, with another £35.1m loss racked up in 2017. EfW jobs resulted in a £95.9m net cash outflow for the business last year.

One particularly eye-catching problem was a contract to build an EfW plant in Glasgow (pictured), where Interserve’s contract with Viridor was terminated last year after extensive delays.  

But Interserve is not fully out of the woods yet on energy-from-waste contracts. It still has four outstanding contracts – in Derby, Dunbar, Margam and Rotherham – all of which the company says are due to complete in the first half of this year.

Interserve has also received some insurance payouts from the jobs and is expecting more this year. Ms White told analysts: “By the end of 2018 we hope to say that it will be done [on EfW], that’s the goal.”

However, as chairman Glynn Baker noted, “significant risks clearly remain”.

Numis analyst Howard Seymour said: “The big imponderable is still energy-from-waste and Derby is the big one. They are not out of the woods yet.”

Interserve support worker site 1

Interserve support worker site 1

Construction – hoping for improvement

Interserve admitted that its construction division had a “disappointing” 2017.

In the UK, the unit recorded a loss of £19.4m and had an operating margin of -1.9 per cent. The firm blamed this on an “ongoing period of challenging market conditions and continued pockets of underperformance in operational delivery in a number of contracts”. After a review of contracts last year, Interserve said it “identified the need for significant balance sheet writedowns”.

As a result of these problems, Interserve has vowed to tighten up the way it signs up for contracts. It has set up a ‘contracts and investments committee’ to approve all contracts requiring a parent company guarantee, a bond, or that are worth more than £5m.

Given how the business appeared to be operating before, this would seem to represent a sensible move.

Khansaheb interserve ajman city centre mall uae

Khansaheb interserve ajman city centre mall uae

Among Interserve’s Middle East work has been the £81m Ajman shopping centre extension in the UAE

Making hay in the Middle East

Interserve’s now defunct rival Carillion was partly undone by some significant problems in the Middle East. Much of the commentary around this was how difficult it is to operate in the region.

But this week we’ve heard a different story from Interserve. When pressed by an analyst about the Middle East, CFO Mark Whiteling acknowledged the problems associated with the territory, but added: “We have a good track record of getting money out [of the Middle East].”

This a far cry from what Carillion boss Richard Howson told MPs about the region in February.

Interserve operates in the UAE, Qatar and Oman through longstanding JVs. It sounded upbeat on the relationships today, talking of “enduring relationships with clients”.

Debbie White Interserve

Debbie White Interserve

Fit for Growth – theory good, but devil in the detail

CEO Ms White talked a good game in management speak about how she intended to improve Interserve’s fortunes, talking of a “laser-like focus on margin and performance”.

It is all part of its Fit for Growth turnaround programme, which Ms White (pictured) hopes will save Interserve around £15m in costs in 2018 and £40m-£50m a year up until 2020.

But market analyst Mr Rawlinson remains to be convinced. “The detail is thin at this stage and there is not much about how the improved company expects to perform better than the competition in the future. It’s more about getting what exists now to perform well.”

He added: “Much more detail is needed to understand the investment proposition. The company tell us that the Fit for Growth plan will deliver £40m-£50m of annual operating profit improvement by 2020 which may happen; we can see how the company can be certain about cost savings but not how much might drop through to profits lines.”

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