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Interserve shares tumble as it issues profit warning and says it could breach banking covenants

Published: 09:48 19 Oct 2017 BST

Interserve
Interserve reported a slowdown in third quarter trading

Support services and construction group Interserve PLC (LON:IRV) has warned that it could breach its banking covenants as it slashed its estimates for second half operating profit.

Interserve said it now expects operating profit in the second half to be about half the level reported in the same period year ago.

READ: Interserve confirms it is in talks with lenders after profit warning

Shares plunged 31.67% to 61.50p in morning trading.

Trading slowed in the third quarter with its UK support services business affected by employment cost pressures and margin deterioration.

Operating profit in UK construction also deteriorated due to challenging market conditions, cost pressures and operational delivery issues.

The group added that while it had made further progress on its energy from waste contracts, it experienced a “slippage” in the anticipated completion date on some contracts. It expects a further £35mln provision will be required, on top of the £160mln set aside in 2016.

Based on the new provision, the additional net cash outflow for the rest of the programme is expected to be £35mln, the company said in its trading update.

“Taking all of these factors into account, we now believe there is a realistic prospect that we will not meet the net debt to EBITDA test contained in our financial covenants for 31 December 2017,” the group said.

“As previously announced, we are engaged in constructive and ongoing discussions with our lenders.“

READ: Interserve rallies as it names new chief financial officer, days after warning on full-year revenue, earnings

Interserve is to launch a group-wide performance improvement plan, called Fit for Growth, to bring its margins up in line with industry norms.

It has also kicked off a contract review across its support services and construction businesses.

"Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company,” said chief executive Debbie White.

“My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company.”

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