The latest profit warning from support services and construction firm Interserve PLC (LON:IRV) seems to have spooked investors today, with the shares more than halving.
However, one commentator thinks that it really should not have been a surprise.
In a note today, Russ Mould, investment director at AJ Bell pointed out that a cursory glance at August’s interim results from the small cap firm would have given both investors and the group’s new boss, Debbie White “a clear indication of the risks and challenges that lay ahead”.
READ: Interserve shares almost halve after it warns full-year outturn will be "significantly below previous expectations”
Mould said: “The first red flag was the latest batch of (supposedly) ‘exceptional’ items, whose consistent presence in the (restated) profit and loss account suggests they are anything but that.”
“The second red flag,” he added, “was the creaky balance sheet. Net debt has mushroomed from £276mln to £388mln during the period and the company flagged that average net debt for the year would come to £475mln to £500mln (with a £45mln pension deficit on top of that).”
Meanwhile, the commentator continued: “The third was the use of impenetrable language.”
Company results should “provide clarity and help investors”
He pointed out that a company’s interim and full-year results “are there to provide clarity and help investors understand how executives are putting their money to use.”
But Interserve’s interims were “packed with unintelligible commentary, particularly relating to the £154mln energy-to-waste project from which it was sacked by Viridor last year.”
Mould said: “Such fudging has done the company no good as today’s update acknowledges that, in addition to tougher-than-expected trading in support services and construction, it will now cost more than the expected £160mln already set aside to extricate itself from the energy-to-waste mess.”
The investment director thinks that, White – who only took over as Interserve’s boss on 1 September in the wake of 18 months’ of troubles for the firm has three immediate challenges: To tackle the company’s debt; draw a line under the energy-to-waste deal; and Improve transparency and clean up the accounts.
‘Strategic review’ may give the shares
He said: “A ‘strategic review’ may give the shares a lift if investors like the sound of her plans, as fellow fallen support services stars such as Serco PLC (LON:SRP) and G4S PLC (LON:GFS) have managed to put themselves back on the road to redemption.”
“But,” Mould adder, “the woes of Capita PLC (LON:CPI), Carillion PLC (LON:CLLN) and others also show that the road is a long one and the combination of complex business models, thin operating margins and lofty debts (and therefore skinny interest cover) can prove a toxic one if anything starts to go wrong.”
In other comment, analysts at leading broker Numis Securities placed their recommendation and target price for Interserve ‘under review’ after the unscheduled profit warning, given the increased uncertainty in regards to outlook.
The broker’s analysts reduced their underlying 2017 and 2018 pre-tax profit forecasts for Interserve by 24%