Friday, January 26, 2018

Interserve Me Up Some Value

Interserve is a UK services and construction company that I have been following for some time. The price has taken a big hit recently, and therefore become a lot more interesting.

What I like about the company is that more than half the revenue is in support services, like facilities management that it undertakes on behalf of clients. This business does not require a lot of fixed costs, and has a lot of repeat business. The future visibility provided by its contracts allows the company to adjust its costs accordingly and therefore not risk losing too much money.

It has been a market darling for most of its public life, but then it invested in a segment that had a lot of losses. It has since shut down that segment (called "Energy from Waste") but the closing liabilities kept growing. Then softness in other segments thanks to Brexit and increasing wages along with debt finally caused the market to totally destroy the share price late last year.

Even in a bad year like 2017 though, operating profits should be about £60 million, vs a market cap of £180 million right now. Enterprise value is about £730, but most of the debt is not due for several years, and the company is in talks with lenders for debt due in 2019 for an extension.

Since the share price fell about 80% over the last three years, last year new management was brought in. The losses from the troubled segment have been finalized, and the core segments are doing better again. As a result, the market price has jumped but it is still nowhere near what it used to be. After the latest announcement on Jan 10th, I believe the risk in the shares came down substantially.

It looks like new management has also found assets it can sell that will not affect revenues. They are also in the midst of a cost-cutting program. Finally, a competitor of theirs (Carillion) recently went into liquidation. This gives Interserve a chance to pick up some more contracts, and may bring a more rational mindset to contract pricing going forward, which would be good for the remaining players.

Disclosure: Author has a long position in shares of Interserve


Philbert said...

What brokerage do you use? I use TD Waterhouse and it does not seem to be available to purchase.

Saj Karsan said...

Yeah, you'd need a broker that does overseas stocks. Interactive Brokers, Fidelity, HSBC are some I know of but you can probably find more by Binging around.

Unknown said...

Shares have lost an additional £100 million since Jan 2018. They look priced for bankruptcy. Looks they have exited the energy from waste business which is good, but interest payments are weighing on results and debt looks extremely high. I feel they will have to sell some major assets to deleverage their balance sheet.

Saj, still a buy at this point?

Saj Karsan said...

I still own my shares, but yeah they have fallen since I purchased and I have not bought more just in case the debt proves to be too high.