At some point outsourcer Interserve (IRV) was going to have to confront disconnect between its earnings and spiralling debt and the result was always likely to be painful for shareholders.
Today’s update on a deleveraging plan gives some insight into just how painful this might be. The shares are down 51% to 11.95p, having earlier trading down more than 70%.
The plan is to reduce the net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) ratio to 1.5-times. Current forecasts and guidance put the ratio at around 4.9-times.
If, as planned, debt is converted into equity to achieve this reduction in debt, from the guided year-end level of £650m to somewhere between £150m to £200m, then not a lot will be left on the table for investors in the company’s shares.
TRYING TO AVOID CARILLION’S FATE
However unpalatable this reality is, the alternative is probably that the company would go the same way as Carillion, which went bust a little under a year ago.
At least Interserve’s full year expectations for 2018 have been maintained and the company has separately announced a £25m contract on the redevelopment of Prince Charles hospital in Merthyr.
AJ Bell investment director Russ Mould says: ‘Ostensibly a huge business with more than 70,000 staff, today Interserve is valued by the market at a little over £10m - the kind of valuation typically reserved for smaller businesses which are not yet making any money, not firms generating revenue in the billions.
‘In fact, Interserve had arguably got too big, with too many moving parts, and this left it particularly vulnerable when margins came under pressure.
Mould adds: ‘Management are doing their best to reassure that the future of the business is viable - chief executive Debbie White says its “fundamentals” are “strong” and this plan will “provide a solid foundation”.
‘However, until the details of the deleveraging effort are revealed and confirmed, something which is planned for early 2019, the market is likely to remain nervous.’
