Russ Mould, investment director at AJ Bell explains:
“The first red flag was the latest batch of (supposedly) “exceptional” items, whose consistent presence in the (restated) profit and loss account suggests they are anything but that.
“The second red flag was the creaky balance sheet. Net debt has mushroomed from £276 million to £388 million during the period and the company flagged that average net debt for the year would come to £475 million to £500 million (with a £45 million pension deficit on top of that).
“The third was the use of impenetrable language. A company’s interim and full-year results are there to provide clarity and help investors understand how executives are putting their money to use. Interserve’s interims were packed with unintelligible commentary, particularly relating to the £154 million energy-to-waste project from which it was sacked by Viridor last year. One footnote was as follows:
‘The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of Equipment Services, along with directly associated costs, are considered to be exited businesses. Exited businesses are presented as exceptional items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring nature). The exited businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within exceptional items differ from those applicable for discontinued operations.’
“Such fudging has done the company no good as today’s update acknowledges that, in addition to tougher-than-expected trading in support services and construction, it will now cost more than the expected £160 million already set aside to extricate itself from the energy-to-waste mess.
“Debbie White took the helm on 1 September and in the wake of the last 18 months’ troubles she has three immediate challenges:
Tackle the company’s debt (as today’s share price collapse suggests investors are far from reassured by today’s assertion from management that Interserve will continue to operate within its banking covenants for the rest of this year)
Draw a line under the energy-to-waste deal
Improve transparency and clean up the accounts, ending the slew of exceptional charges that are not exceptional, stop restating the numbers and use language which people can actually understand
“A ‘strategic review’ may give the shares a lift if investors like the sound of her plans, as fellow fallen support services stars such as Serco and G4S have managed to put themselves back on the road to redemption. But the woes of Capita, Carillion and others also show that the road is a long one and the combination of complex business models, thin operating margins and lofty debts (and therefore skinny interest cover) can prove a toxic one if anything starts to go wrong.”