Interserve seems to be in the process of losing the support of investors, almost a year since it became obvious that Carillion was in trouble. On paper, Interserve looks like a huge business, with more than 70,000 staff, yet the market values it as a little over £10 million. This is the kind of valuation that is usually reserved for companies that are still quite small and not making much money, not one that is raking in billions.
Is Interserve the next Carillion?
In January, following Carillion’s collapse, government officials began keeping a closer eye on Interserve, which faces the same toxic mix of loss-making contracts and unsustainable borrowings. Interserve’s solution is a big debt for equity swap to cut its net debt to earnings ratio to 1.5x. Based on current estimates and guidance, the year end ratio is expected to be closer to 5x.
“Such an effort is likely to result in significant dilution for shareholders, which explains why the shares have been so heavily marked down this morning,” says Russ Mould, investment director at AJ Bell.
Interserve’s management is doing its best to reassure investors that the future of the business is viable. The company’s chief executive Debbie White says Interserve’s fundamentals are strong and that her plan will provide the firm with a solid foundation. Mould reckons the market is likely to remain nervous until the details of the deleveraging effort are revealed and confirmed, which is planned for early in the New Year.
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Interserve shares fall off a cliff
Interserve shares fell off a cliff this morning, having closed Friday at 25.05 and are now trading at around the 12 mark. This has wiped half the value off the company in a morning. It is testament to how jumpy investors are feeling in the wake of the collapse of Carillion. Interserve stock has been on a steady decline, having been traded as high as 112 back in May.
“At the last look net debt had risen to £614.3 million, more than doubling in a year,” said Neil Wilson, chief market analyst for Markets.com. “With more than £400 million in deleveraging for a company with a market cap of £10 million, it’s fair to say existing shareholders face wipeout, but at least the business should struggle on.”
Short interest on Interserve is not as high as Carillion’s was even six months before the company collapse. Big shorters of Interserve stock include hedge funds Brightsphere and the FP Master Fund, but none of the bigger hedge funds. Total short interest is still less than 6%. However short interest has increased considerably since the beginning of the year and we expect that several smaller funds are actively shorting Interserve.
Interserve has been struggling with its exit from the energy to waste sector since 2016, with the estimated cost being regularly revised upwards. A £300 million rescue deal was agreed with lenders in March. The latest one has not gone down well with investors and we expect from damage to Interserve’s share price over the next few months.
