Herewith my letter. There is much more I could have added but letters have to be brief. Of the UK bank lending to business, over 80% is for construction with over 80% of that construction being in London and over [...]
Energy from Waste or Wasted Energy as UK Contractor Interserve Has Found to Its Cost.
I have a holding in Interserve a UK based support services and building contractor. It was until recently one of my larger holdings. From the 2009 financial crisis share price lows of sub 200 pence per share it climbed to peak at over 700 pence per share in early 2014 and has since retreated again to circa. 240 pence per share at the time of writing.
It has recently announced it will cut its final dividend to conserve cash. The company has hit some headwinds of a managerial and contract nature and not just market based volatility.
This company’s performance to date demonstrates well the high risks and rewards (for the patient and prudent) of buying, holding, taking profits, dividends and timely selling of holdings by small private investors in volatile stocks such as Interserve.
It’s never easy or dull that’s for sure however as the blog title suggests one of the reasons for the recent share price fall and poor performance financially, with a pre-tax loss of £94.1Million on a £3.2 Billion turnover, is a huge provision at a Glasgow energy from waste project with Viridor, a waste management company, which has clearly gone spectacularly wrong for the company.
The contract was worth £146 Million and the financial provisions made in 2016 were £70M has now increased to a whopping £160 Million. The company has been replaced on the contract and as the numbers indicate legal action against it seems likely.
Unsurprisingly, Interserve is divesting its energy from waste (incinerators) business units. Indeed analysts at the broker Liberum informed their clients in a recent research note, “we can have no confidence the provision is adequate,” (Money Mail, 2017). This is a damning comment.
Can management be trusted to sort out the business, will there be other problems emerging from the huge low margin turnover and disparate operations? Should there be a top to bottom purge of the incumbents with a new team taking the helm? Where hopefully, after completing their own purging of any further bad news, they will steer the company to a more profitable and stable future similar to their construction competitor Balfour Beatty.
The large corporate shareholders, pension and insurance companies, will be having their discussions with the management no doubt although I guess those will not be as widely reported as the recent results and the rather public ousting from its contract in Glasgow.
In my opinion, there is execution risk in either buying or holding this stock and any share price recovery to previous highs certainly won’t be this year either or maybe not even in 2018. However, I will continue to hold as I believe, along with Balfour and Carillon, Interserve will play its part in the UK infrastructure projects of the coming decades. Royal assent has now been given for HS2 to commence in a matter of weeks with the £22 Billion first phase from London-Birmingham line, “scheduled to open in December 2026, with a second Y-shaped phase launching in two stages with a total bill estimated at £56bn,” (Plimmer, 2017, FT).
Surely, a reinvigorated Interserve can take advantage of this massive project in its home UK market. It’s a long hold for me as a patient little deal clincher.
References and further reading
Money Mail Reporter; (2017); This is Money: “Interserve’s failed energy-from-waste project black hole deepens to £160m – more than double original estimates,” Associated newspapers Ltd. Website accessed- 6th March 2017:
Plimmer, G; (2017);“HS2 line construction to start in weeks after royal assent,” The Financial Times Limited, London, UK. Website accessed 6th March 2017: https://www.ft.com/content/0bf8aa04-f9bb-11e6-9516-2d969e0d3b65