Interserve half year results mixed, but confident of future

Interserve today announced half year results that were 24.2% down on last year and its future workload also decreased by 14.9%. However the company also showed confidence in the future by raising the interim dividend 0.1p to 5.6p.
When just glancing over the figures, Interserves interim results are disappointing with a 24.2% drop. However, when reading the comments by Adrian Ringrose the chief executive and Lord Blackwell the chairman it is somewhat reassuring.
Adrian Ringrose commented: “Uncertainties persist in our markets, but we remain confident that the second half will show a significant uplift on the first half and that we have a strong international platform from which to sustain long-term growth at attractive margins. Consequently, the Board is continuing with its progressive dividend policy.”

Results by sector

Support Services

Support services increased their revenue by 6.8% to £538.2million however a decreasing margin resulted in a decreased of profit by 16.8% to £8.9million

Project services

Project services performed strongly despite a 6.3% drop in UK revenue the UK profit increased 53.5% to £10.9million. There was also a positive performance from their international associate companies as profits here increased by 14.5% to £12.6million

Equipment Services

After an extremely strong year last year it was always expected that revenues and profits would decrease significantly. The profits in fact decreased by 62.3%to £7.7million

PFI Investments

The total contribution to group revenue from PFI investments decreased by 33% to £2.8million, the drop is due to the transfer of 13 PFI investments to their pension scheme.

Future growth

So the results are down and the markets especially the UK public sector construction market are down so where will future growth come from? Reading through the results I believe that growth by division will come from;

Support Services

- Improvement of margins in existing support services contracts. The revenue in support services actually increased by 6.8%, however profits were down 16.8%. This is due to the margin decreasing by 0.4% to 1.7%. The company is confident that they can significantly improve the margins on existing contracts.
- New contract wins in UK support services as the UK government looks to meet its spending objectives by outsourcing more services.
- Gain support services contracts in their existing markets in the UK

Project Services

- Targeting new sectors in the UK construction market notably waste and retail
- New contracts wins from their existing Middle-East businesses
- Establishing new revenue streams in existing Middle-East geographical markets, for example the new joint venture company in Oman, a health and safety training provider in the petrochemical market.
- Establishing joint ventures in new geographies. The company has recently committed £5million to a joint venture company in Southern India. The company has also confirmed that they are looking at further opportunities to expand their international reach.

Equipment Services

- The company has recently entered the Saudi Arabia market and should hopefully see strong growth in what is the middle-East’s largest construction market.
- The company is also expecting growth in Australasia as the mining sector picks up.

PFI Investments

- The company is shortlisted on several projects in the health, waste, police and custodial sectors.
- Cash flow and profits should increase as projects mature.

All in all there are significant growth opportunities for the group, but off course there are also risks involved. Notably the pension deficit, which increased slightly although the company believe they have now made manageable steps to reduce the deficit.
The company’s order book also fell by 14.9% and profits for the half year fell. The economic environment also remains fragile and a double dip recession could hurt the company’s prospects. Although over 50% of the profits are derived outside the UK so the company is less exposed than some of its rivals.

The positives for me are the reduction in net debt from £85.1million to £53.1million and the increased dividend. I personally believe that the company remains undervalued and I will continue to hold my shares.

If you want to be informed when I next post an update about Interserve please fill in your email below.