Investors in Interserve shares will be grinding their teeth as they try to figure out what the future holds in store for the company. The Interserve share price is subject to conflicting sentiment in the market.
On the one hand, there’s the good news. The group recently had an extension for its contract to provide services to the BBC‘s operations at Media City in Salford, not to mention Broadcasting House in Portland Place in London, and Pacific Quay in Glasgow. The contract extension for Interserve has been valued at £130 million.
But then there’s the bad news. Let’s start with the disappointing numbers for July and August, which shaved 30% off the Interserve share price. This was partly driven by the revision to the likely cost for Interserve to exit waste management contracts. On top of that, Interserve is also in discussions with its banks, never a good sign for holders of its shares. And now a consultancy, Oliver Wyman, has been brought on board, ostensibly to help it overhaul its operations.
Interserve recently appointed a new CEO in the form of Debbie White, who came aboard on 1 September. But it is also in the process of losing its CFO.
Friends in high places?
Government contracts seem to be keeping it going: it secured a £227 million facilities management contract from the Department of Work and Pensions to provide services for five years. And it has also scored a place on an £8 billion panel to build new houses on public sector land. It means Interserve can now bid for contracts to build houses on state-owned land over the next four years. One does get the feeling that Interserve has friends in high places that are looking out for it.
But breaching banking covenants, or even talking about the possibility, will not sit well with those who hold Interserve shares. It just doesn’t look good. Profits are coming under pressure from additional costs, tough trading conditions and other nebulous operational delivery issues. Take its contract to build a recycling and renewable energy plant in Glasgow: this got knocked on the head by Viridor after extensive delays.
Interserve shares are in good company
Interserve is in good company, with competitors like Carillion and Mitie also experiencing problems, and we’ve given both of these laggards some column inches in The Armchair Trader recently. Looking at the Interserve share price over the past few months, it was trading just under 300.00 in late July. Its trading update in September, two weeks into White’s tenure, delivered a body blow to the Interserve share price. It plumbed a new low in mid-September of 73.75 and at time of writing was at 73.32.
The Armchair Trader says
The whole sector is experiencing tough trading conditions, and while lack of government contracts can be blamed to an extent, we are also worried about the degree to which the new business coming in seems to also be coming from the government. Yes, the government contracts are the big landmark deals, but holders of Interserve shares will need to think hard about how much private sector business it scores over the winter. We certainly wouldn’t want to be in White’s shoes at the next trading update.