Support services company Interserve (IRV) is being watched by Government officials following the collapse of its peer Carillion (CLLN). That news triggers a 4.3% decline in its share price to 115.8p.
Carillion was forced into compulsory liquidation after racking up £900m net debt position and a £587m pension deficit. Its lenders were unwilling to extend the company any more funds nor was the Government interested in bailing the company out hence it went to the wall.
Interserve also has substantial net debt, standing at £513m at at the end of 2017 and £44.9m pension deficit. In comparison, the market value of its business is currently a mere £168.7m.
Shares recently revealed Interserve’s new management had put a plan together which pleased its investors and analysts believed its lenders would be ‘forgiving’ of it needing more time to meet its creditor agreements.
The company employs 80,000 staff worldwide with annual revenue of around £3bn. It first came under scrutiny by the Government when it released a profit warning in September last year warning its full year numbers would be ‘significantly below previous expectations’.
Unlike Carillion which had a myriad issues impinging its business, Interserve’s main problem has been its Energy from Waste division, which has caused significant outflows of cash.
Given that the company provides cleaning, security, probation, healthcare and construction services, a similar offering to Carillion, it seems apt that the Government is concerned.
No panic
A spokesperson for Interserve says ‘last week we announced that we expect our 2017 performance to be in line with expectations outlined in October and that our transformation plan is expected to deliver £40m-£50m benefit by 2020.
‘This remains the case and we expect our 2018 operating profit to be ahead of current market expectations and we continue to have constructive discussions with lenders over longer-term funding’.
The spokesperson adds: ‘We are keeping the Cabinet Office closely appraised of our progress as would be expected’.
According to a Financial Times article, a Government aide confirmed that Interserve was being monitored but said there was ‘no comparison’ with Carillion. They added ‘there are regular discussions with all of our 30 strategic suppliers’.
While Interserve seems to be able to ride the current wave of uncertainty, there are some investors who aren’t hopeful for the company.
At the moment, 8.6% of its stock is currently being shorted, or in other words investors are betting on its share price falling.
Investment bank Liberum gives Interserve a high risk ‘buy’ recommendation saying it is ‘cheap and not Carillion’.
Liberum adds ‘there is clearly too much debt with limited headroom’ but also says it can sell businesses and shareholders would support an equity placing.
Using Liberum’s forecasts the company trades on a mere 2.9-times 2018’s 39.3p of earnings but given the level of debt no dividend is forecast anytime soon.
