Interserve PLC (LON:IRV) shares slumped after the UK support services and construction firm posted a sharp decline in first half profits, blaming an increase in the UK minimum wage, restructuring costs and challenging markets.
Headline profit before tax in the six months to 30 June totalled £36.5mln, compared to £55.2mln in the same period a year earlier.
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The support services division’s profits were affected by regulatory costs, including an increase in the National Minimum Wage in April, a hike in pension service charges, the Apprenticeship Levy and changes to the application of holiday pay.
Interserve said the construction arm was hurt by persistent challenging market conditions and an underperformance in operational delivery, which resulted in a small loss.
Revenue was stable at £1.6bn from £1.63bn last year, reflecting delays in obtaining government contracts due to the UK general election and last year’s Brexit vote.
Net debt at the end of June was £387.5mln, up from £274.4mln in the year-ago period, and Interserve sees this reaching £400mln to £425mln at the end of 2017.
Chief executive Adrian Ringrose said the company expects the restructuring and cost reduction measures taken in recent months to benefit its support and construction businesses in the second half.
“Despite the increased political and macro-economic uncertainty following the UK's EU referendum and recent general election, our outlook for the current year remains unchanged,” he said.
The company said provisions taken for exiting the energy-from-waste sector remained appropriate, though “significant risks and uncertainties remain”. In February, it announced it expected to book a £160mln charge for its exit from the business.
Shares fell 4.03% to 214.25p in morning trading.
"Energy-from-waste remains the key focal point and we believe the risk profile in this area is reducing, though rising net debt in 2017 associated with this may confuse the issue in the short term but should not be taken out of context," said Numis.
"Energy-from-waste aside, the group is operating in differing markets across all divisions but we believe management actions are taking effect in difficult areas while good performers will maintain their performance."
Numis maintained its 'buy' rating and target price of 395p.