Interserve is warning that it is now expecting operating profit for the overall group in the second half to be approximately half the level of that which was reported in the second half of last year and that it is likely to breach its banking loan covenants.
According to its latest trading update, the firm’s UK construction business has seen a further deterioration in operating profit – attributed to challenging market conditions and cost pressures as well as operational delivery issues which have continued to impact performance.
In contrast, the equipment services business is performing well and as anticipated, the international support services business has started to improve versus the first half performance and Interserve has maintained a stable performance in international construction.
Following on from its 14th September trading update, trading in the third quarter has seen a slowdown from that reported in the first half.
In addition, while some progress has been made on the loss-making energy from waste contracts in the quarter, the firm has seen a slippage in the anticipated completion date for some of the contracts. Interserve is now anticipating, in addition to the £160m provided in 2016 for the cost of exiting, an additional £35m provision is required and significant uncertainty remains on the timing of commissioning.
The firm said:
“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 31st December 2017.
“As previously announced, we are engaged in constructive and ongoing discussions with our lenders. We have engaged a financial advisor to assist us in these discussions, as well as looking at options to maximise the short and medium term cash generation from the business.”
The company is launching a group wide performance improvement plan, Fit for Growth, aimed at improving margin performance to industry norms. Interserve has also initiated a comprehensive contract review across both the support services and construction businesses.
Debbie White, Chief Executive, commented:
"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. 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".
Following the issue of its second profit warning in two months, Interserve shares dropped 38% to 55p in early trading yesterday, making the company worth just £80m.
The firm is due to start work at the end of October on a £20m project to upgrade Yorkshire Water’s Lundwood sewage treatment works in Barnsley. The major upgrade will include the removal and reinstatement of the existing filter beds, construction of a new activated sludge treatment process and a new inlet built and fitted with a new odour control unit.