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Interserve to quit Energy from Waste jobs after problem contracts force half year loss

Interserve will quit Energy from Waste jobs after problem contracts in the sector forced it into a £34m half-year loss.

The EfW sector is confined to six jobs, with whole life revenue of £430m between them.

The contracts were entered into by Interserve between mid-2012 and early 2015 and are expected to be completed next year.

They include the £155m Glasgow EfW scheme, which has seen workers go on strike and EfW tech provider Energos go into administration blaming contractual disputes.

Interserve said the financial impact from the deals would be around the £70m mark outlined as an exceptional loss provision in its May trading update.

It expects the cash impact to be “substantially borne this year”.

In its half-year results, Interserve said: “Managing the challenges of exiting from these complex projects is a significant priority, as is ensuring our processes continue to improve given the lessons we have learned.”

Away from the EfW sector, Interserve delivered increased revenue of £1.63bn, up 2.4 per cent on H1 2015 (£1.6bn).

Its headline total operating profit was £62.9m, up from £61.6m, but this is restated to take account of non-trading and non-recurring items.

The group’s cash position improved, with net debt reduced to £275.6m from the full-year position of £308.8m.

It has improved its year-end net debt guidance of £300-£320m, having warned in May that it would be around £35m higher than previously guided at the year end.

The strategic review of the RMD Kwikform business is ”proceeding as planned” and is now expected to conclude later this year.

Interserve’s One Nine Elms contract collapsed earlier this year, with Balfour Beatty taking on the job, while a buyer also pulled out of a deal to purchase its Ellesmere Port off-site plant last month.

Results summary H1 2016H1 2015Change

Revenue

£1,632.9m

£1,595.1m

+2.4%

Headline total operating profit

£62.9m

£61.6m1

+2.1%

Gross operating cash flow

(Loss) / profit before tax

£128.3m

(£33.8m)

£19.9m1

£33.7m

 

Headline Earnings per Share

1 = includes non-statutory measures to reflect the
impact of non-trading and non-recurring items

31.3p

 

31.0p1

 

+1.0%


Equipment Services continues to show “good momentum”, the contractor said, particularly in the UK and Far East, increasing revenue by 5 per cent. 

There was a £33.2m reduction in net debt from the end of 2015 and Interserve won new work in the period with an aggregate whole-life value of £1.9bn.

UK construction

In UK construction, the group’s operating margin was 1 per cent, compared with 3.9 per cent internationally.

Interserve said: “The substantial majority of our UK construction activity is focused on projects with an average value of less than £10m, constructing a range of buildings and infrastructure.

“Our operating model combines a strong regional presence and exposure to framework agreements with infrastructure and public-sector customers, in sectors such as defence, education and healthcare, along with our growing presence in the commercial development and fit-out markets.  

“Work-winning in the period was healthy, with our future workload increasing by 1.9 per cent to £1.4bn.”

Analysts react

Liberum issued a sell notice on Interserve’s shares this morning.

It said: “H1 16 results weak but better than expected with no change to the £70m construction exceptional. Our low estimates unchanged at this stage given our caution on the Middle East and UK construction. Net debt reduced from £333m to £310m, but still too high.”

However both Numis and JP Morgan were more positive.

Numis said: “A key positive is the reduced net debt at H1 and for the full year and beyond, even though the majority of the cash issues associated EfW will now occur in the current year.

“The strategic review of Equipment Services is proceeding as planned, and this business is experiencing stronger conditions across several international markets as well as in the Middle East, illustrating the breadth of the business. We retain estimates, target price and view that Interserve is the most geared recovery play special situation in the sector.”

JP Morgan said: “Interserve’s H1 cashflow performance has been excellent. Having disappointed previously, working capital has come increasingly in focus, and the group benefitted from a large inflow in H1.”

More to follow

Interserve CEO reaction:

Chief Executive Adrian Ringrose said: “Trading in the first half of the year, across the vast majority of our divisions and our regions, has been good, in markets that offer both opportunities and challenges. We delivered a strong cash performance and grew revenue and headline operating profit.

“We are taking action to exit the Energy from Waste sector. Our assessment of the aggregate impact of exiting this sector is in line with the £70m exceptional charge we announced in May.

“Despite the increased political and macro-economic uncertainty following the UK’s EU referendum, our outlook for the current year remains unchanged. This, together with our significantly improved cash flow and healthy future workload, underpins the Board’s confidence in our prospects and a further increase in the interim dividend.”

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