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Another blow for the Interserve

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The Interserve plc (LON:IRV) (IRV.L) share price is down 28% today after it released a disappointing trading update. Trading in Q3 has seen a slowdown from the company’s H1 performance.

In UK support services, this was driven by employment cost pressure, contract mobilisation costs, margin deterioration due to an inflexible cost base and contract performance in the justice business.

The company’s UK construction business has seen a further decline in EBIT due to difficult market conditions and cost pressures, as well as operational delivery issues.

The equipment services business is performing well, while the international support services and international construction divisions have offered some cheer for the business.

Further progress has also been made in the Energy from Waste contracts. However, there has been slippage in the anticipated completion date for some of the contacts. Interserve now expects in addition to the £160 million provided in 2016 an additional £35 million provision is required.

Due to the above, there is a realistic prospect that the net debt to EBITDA test within the company’s covenants will not be met for the 2017 financial year. The company is in talks with its lenders, and those talks are constructive according to today’s update.

In the last year the Interserve share price has fallen 83%. This is a worse performance than other support services companies such as Capita PLC (LON:CPI) (CPI.L), Rentokil Initial plc (LON:RTO) (RTO.L) and G4S plc (LON:GFS) (GFS.L). Capita is down 12%, Rentokil Initial has gained 31% and G4S is up 17% during the same time period.

In my opinion, the near term outlook for Interserve is challenging. Although I believe there is a sound fundamental business which is winning new contracts and performing well in some of its segments, the overall performance of the business is disappointing.

Investor sentiment is continuing to decline and with the prospect of a failure to meet its banking covenants, I feel it’s a stock for me to watch but not buy at this moment in time.

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