With a debt burden 1.3 times the market capitalisation, Interserve PLC’s (LON:IRV) new boss will have a lot of repairs to do, Peel Hunt says.
Debbie White will replace Adrian Ringrose as chief executive on 1 September.
Given her support services/finance background – Peel Hunt declared itself impressed by her 13 years at French facilities management giant Sodexo – she might be tempted to radically refocus the group.
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However, given the continuing risks from the Waste to Energy money pit plus the growing debt mountain, the window for proactive change is limited, the broker reckons.
On the other hand, ‘steady as she goes’ is not really an option, and the new boss needs to perform some drastic surgery to strengthen the balance sheet and position the construction and support services firm for higher quality earnings growth.
“Debbie’s inevitable strategic review must surely place Equipment Services back on the potential disposal roster and also give consideration to the positioning of the UK and Middle East Construction activities,” Peel Hunt postulates.
“The principal earnings/balance sheet risk still rests with the Energy from Waste contracts (principally Glasgow and Derby). The £160mln provision, still a “best estimate”, relies on certain recoveries and assumes the ‘process’ technologies will work,” Peel Hunt notes.
“We believe that it could be at least 12-18 months before any real clarity can be provided on the provision, but our experience would suggest that there is still a risk of material increases,” it added, as it moved from ‘hold’ to ‘reduce’.
The target price has been cut from 250p to 200p, some 24p below the current share price, which was down 4.3% following the downgrade.
“Following the suspension of the dividend, there is no yield support and realistically then little likelihood of any pay-out before 2019. Interserve remains a high risk investment proposition and the incoming CEO has some big decisions to make,” the broker opined.
“Too many risks for us,” it concluded.